Channel Financing is an innovative option for extending working capital finance to

dealers who have business relationships with large companies.

Channel Financing is the mechanism through which a Bank / Financial Institution
meets the various funds related requirements along the Supply Chain at the
suppliers end. This thereby helps the supplier in sustaining a seamless business
flow and avoiding Working Capital related difficulties.

Channel Financing could cover: -

1) Discounting of Trade Bills drawn by a company and accepted by its Dealers /

Distributors / Channel Partners.
2) Providing Overdraft facility to the dealers / distributors who have business dealings
with large Corporate.

Benefits Of Channel Finance / Channel Financing: -

A) Advantages to Corporate: -

- Assured availability of Working Capital finance to their channel partners at lower than
current cost of credit
- Corporate can use Channel Finance as a marketing tool and strengthen their
relationship / reward loyalty of their Channel Partners
- Release of funds from the Balance Sheet resulting in improvement in financial Ratios
- Conversion of Balance Sheet into an Off Balance Sheet liability

- Greater efficiencies in the Corporates’ receivable management and cash management

process
- Ability to introduce payment discipline with their Channel Partners

B) Advantages to Dealers/Distributors, i.e. the Channel Partners: -

- Steady and cheaper source of Working Capital financing

- Channel partners can increase Sales through higher purchasing power
- Clean facility up to certain limits
- Simplicity of documentation and approval procedures
- High service and delivery standards compared to current neighborhood Banker /
Moneylender
- Channel partners may be able to increase profitability by availing of cash discounts
from Corporate

http://www.channelfinance.com/
 CHANNEL FINANCING
Forward and backward linkages in a business organization play a significant role in the
success or failure of the business entity. For (say) a manufacturing or trading firm, while the
suppliers of raw material are important as they provide input for production, equally important
is the role of its distributors which sell products manufactured by the firm through retailers to
the ultimate consumer. Channel financing relates to ensuring that integrated financial and
commercial solution is available to the entire chain of supply and distribution, that could
ensure the health of the firm, financed by the bank. 
How channel financing is different from conventional lending? 
Channel financing is different from the conventional lending since, in conventional lending, the
financing banks are generally not concerned as to how the suppliers of the firm and dealers of
the products of firm, are financing their activity. The weak financials of the supplier (leading to
delay in supply and non-availability of market credit) or the dealers of the products (delay in
receipt in payment leading to higher book debts) could adversely impact the top-line(sales) as
well as bottom-line(profits) of the financed firm. In the channel financing the financing bank
may have to find ways and means as to how the suppliers and buyers (dealers of the product)
can be financed through various instruments/facilities. Hence, the channel financing adds
value to the transaction for all the parties concerned, be it the manufacturer/trader, the
supplier of the inputs or the dealer/buyer or the financing bank. 
Methodology : Through channel financing, the business firms can out-source a major part of
their working capital needs thereby reducing their dependence on bank finance. For instance,
it need not avail of credit from its bank to pay off the supplier if the supplier gets the finance in
his own name from the bank for the raw materials supplied on credit in the form of say,
drawee bills financing. The bank can also allow loan to the dealer for the credit term that has
been fixed between the firm and the dealer in the form of receivable finance or finance
against book debts or factoring of the receivables. This enables the manufacturing firm to get
cash immediately for the finished goods supplied. This firm functions as the principal
customer which suggests the names of its suppliers and dealers to the bank. Thereafter, the
bank makes a due diligence assessment of the suppliers’/dealers’ standing and credit
worthiness and decides to provide finance on merit. 
Benefit to the financed concern, the supplier and the dealers/buyers : The pre and post
sale working capital requirement of the manufacturing concern, would be scaled down. Such
firms can concentrate more on their core competence area of production and marketing their
products besides saving time and costs involved in arranging creditors and monitoring
recovery. As regards the suppliers and dealers, the major benefit is that they get payments
promptly, which improve their liquidity position and cost. This also helps them as well as the
bank to cut level of counter party risks. 
Gains to banks : The banks also gain substantially from the process of channel financing
which include increased customer base, effective due diligence and smoothness of lending
activity and loan origination process. Besides, the banks will be able to ensure better credit
discipline. Since the risk is diversified through finance to supplier, manufacturer and the
dealers, the credit exposure norms are better observed. Hence channel financing is a very
convenient tool in managing their assets portfolio. 
Why banks should adopt channel financing : Channel financing, due to its distinct
advantages to the business firms as well as banks, has been suggested for implementation in
various forms, by various committees in India such as receivable financing by Tandon
Committee, drawee bills financing by Chore Committee and through factoring by
Kalyansundram Committee. Channel financing opens up manifold opportunities due to which
the banks can make conscious efforts at popularizing this credit delivery mechanism.

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