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What is channel financing? How is it different from lending?

06 Feb, 2015

A business has a lot of details to look after. But one primary thing without which a business cannot run is the business capital. Every business has to maintain a chain of process. Starting from producing raw materials for a product to the retail selling of the same, many parties are involved in profit making. Even a single issue in one particular part can collapse the whole chain. It has often been seen that small business entities or entrepreneurs fail to maintain the chain due to lack of fund; the big companies, the consumer of the raw materials and the manufacturer of the products look for other options to keep the flow on. But on a large scale the crisis can cripple the system. To keep the chain of process unbroken, banks and other financial organizations have come up with a unique solution and that is Channel Financing.

Channel financing is a pioneering idea for offering dealers, who have business relationship with big commercial entities, the capital finance. It is a process through which the banks or any other financial institutions address the capital related necessities along the supply line. It helps the suppliers to keep an incessant business flow and it also ensures that the business capital does not run dry. The benefits of channel financing are so multi faceted that everyone within the supply chain has embraced this unique solution. The big companies, to ensure the smooth run of business, have also extended their help to accommodate the suppliers and the sellers to obtain channel finance.

Channel financing offers a lot of benefits to the producers, dealers and distributors. These benefits are:

  • It offers working capital finance to the channel partners at a lower rate than the current credit cost.
  • Channel finance can be used by the corporate as a strong marketing tool. It can help them in building a better bonding with the channel partners.
  • It can develop the financial results by releasing the funds from the balance sheet.
  • It will enable the channel partners with increased purchasing powers which is turn will increase the sales.
  • The channel partners will get working capitals at cheaper rate and in a steady flow.
  • One can receive numerous facilities up to a certain level.
  • The processing is easy and less documentation is needed.
  • Corporates can offer cash discounts which will definitely get reflected in the increased profitability of the dealers or distributors.

Channel Financing Vs. Conventional Lending

In conventional lending, the bank or the financial institutions is not always concerned about the source of capital the suppliers or the dealers of big firms have; whereas, in channel financing the finance company considers the whole chain of process before sanctioning the loan amount.

Financial instability of the supplier or the dealers can hamper the whole chain and a crisis in the market would be created. To avoid such situation the finance companies look for ways to accommodate the supplier through various facilities and that also considering the corporate and its transaction with the dealer or the supplier. And unlike conventional lending, the big firm gives an assessment report to the financial institution to help them provide the working capital to the smaller firms.

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