Channel Financing

Updated on :  

08 min read.

Channel financing is a structured financing programme that offers working capital funding to the supply chain stakeholders (the buyers and the sellers). It helps the stakeholders sustain seamless business flow by avoiding working capital difficulties.

What is channel financing? 

Channel financing is a type of financing which provides immediate realisation of sale proceeds to the supplier, making it a cash sale. It is a funding mechanism by which banks, venture capitalists or any other financial institute provides short-term working capital facilities to the supply chain stakeholders. The different products covered under channel financing are overdraft, cash credit, bill discounting, etc. It is a credit facility that is mutually beneficial for both the buyer and the seller.

Uses and advantages of Channel Financing

Receiving timely funding for working capital needs is the major benefit of channel financing. Other than that, below are some of the other benefits of availing supply chain financing:

  1. Faster payments: Sellers receive immediate payment for its sale from the channel finance provider. Nowadays, the channel finance providers directly connect with the sellers’ POS (Point of Sale) system, speeding up the payment process.
  2. Improved efficiency: With the risk assumed by the financing company, the seller can focus on high-value tasks rather than chasing payments and verifying customers’ creditworthiness, improving efficiency.
  3. Collateral-free finance: One need not think about collateral when opting for channel financing, as financial institutions provide funds against unpaid invoices. This makes the funding process fast and simple.
  4. Increased liquidity: Receipt of payments on time provides liquidity, and the chances of bad debts become remote. Also, with uninterrupted cash flow, efficiency and productivity are enhanced.

Channel financing and its impact on the supply chain

Here are how channel financing helps streamlines supply chain management:

  1. Improved cash flow: By opting for channel financing, suppliers can get early payments and buyers can delay the payments till maturity. This helps in boosting cash flow. Also, on-time availability of funds safeguards supply chain activities from any demand fluctuations.
  2. Better inventory management: Improved cash flow enables organisations to invest in better quality raw materials and use innovative solutions to forecast demand. This helps businesses in maintaining proper inventory levels and meeting customer demands.  
  3. Shorter working capital cycles: When a supplier provides goods or services on credit, it creates pressure on its working capital. But, with channel financing, one can easily avail funds as and when required for its smooth operations and maintain sufficient liquidity.
  4. An improved alliance between the buyer and the seller: In a supply chain, buyers want to delay the payment until maturity while the sellers are looking for quick cash conversions. This difference in trade objective brings inconsistencies in the supply chain. Channel financing helps suppliers sell goods or services on credit without widening the working capital gap. Since buyers are not under any pressure to make payment before the due date, there exists a cordial relationship between the buyers and the sellers.
  5. Easy and affordable access to funds: An organisation can raise funds against its unpaid sale invoices in this setup. There is no additional debt burden, with relatively lower interest rates when compared to traditional lending. Overall, this makes access to capital easy and affordable.

Thus, with channel financing, procurement and payment have become much faster. Despite differences in trade objectives, buyers and sellers can maintain cash flow, thereby improving the quality of business operations.

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