What is Channel financing, This article talks about the process of channel financing, how it can be obtained, what are the different ways in which they are operated by different banks, and how it is different from the lending of funds which is also similar kind of practice adopted by them. This type of facility is beneficial to both dealers and the corporate as in case there is a win-win situation. I have discussed all the details about the same in the below article.
What is meant by Channel Financing??
Channel financing is a facility provided by banks for financing the stakeholders of a particular enterprise through which they may attain the confidence of the stakeholders, i.e. they offer short-term financing to the stakeholders, i.e buyers or suppliers. Every business has to maintain a position in the market and has to work according to the competitor’s workings.
Every business has to maintain a chain of particular things. Starting from raw material to the retailing of the same product, business need to maintain the working of all these processes. To keep the process chain unbroken, banks and other financial institutions are offering the facility called channel-financing.
It provides finance to all, i.e. dealers, creditors, other stakeholders in an enterprise. Banks and financial institutions provide credit means overdraft facility to the corporate. Channel financing is a new way of financing in a way that they offer services to large companies in India. It not only provides facility to corporate but also supplies finance to his suppliers, stakeholders, etc.
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When any enterprise or institution is having the capacity to finance all the transactions happening in business than there is no need for channel-financing, this concept arises only when the enterprise needs the fund to pay its creditors and has not sufficient funds to pay off, then only the concept of channel financing comes.
Advantages to Dealers:
- Assured payments to their stakeholders on time.
- It can be used as a marketing tool for getting cash discounts from their suppliers
- As payment is made on time, there would be an uninterrupted supply of materials.
- A cheap source of working capital financing.
- Easy Scheduling the payments
- Easy in comparison to loan money.
- As there is an uninterrupted supply of materials, sales would increase
- Less documentation in comparison with lending
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Advantages to Corporates:
- Immediate realization of sales
- Quick delivery of the goods
- Easy reconciliation to the corporate
- Steady cost of funds
- Efficiency and productivity are enhanced as cash flow is working in a proper manner on a timely basis.
- Payments are received on time so chances of bad debts are very less
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Old Lending V/s New Channel financing
Channel financing is the newly emerged concept for the new enterprises that are in need of the funds. In the old lending method, banks were not much concerned about the source of capital of the enterprises, but in channel-financing, they are concerned about the whole channel, who are the stakeholders, is this party would be liable to pay, etc and then sanction the finance.
In the old lending method, they did not provide the reports to the companies or enterprises, but in channel financing, the banks provide the assessment reports to the holder and help them analyze their working capital cycle.