If you are a Dealer based Business, Use Channel Financing to be Cash Rich

Channel Financing: The Unsung Hero for Dealer-Based Businesses

Channel financing is a brilliant liquidity tool for businesses with dealer-based models. It enables smoother cash flow, faster turnover, and eases the working capital burden for both the anchor company and its dealers.

Here’s how it works:

The anchor company (parent) gets an in-principle sanction of an overall limit from a bank or NBFC, with a predefined cap per dealer. For instance, a company with ₹500 Cr in monthly sales might secure a channel financing limit of ₹100–200 Cr, capped at ₹1–2 Cr per dealer.

This becomes a game-changer for dealers who typically can’t access direct funding due to weaker financials or insufficient collateral. Dealers utilize this limit to pay the company upfront, and later repay the bank within 90 days (or as per agreed terms).

The benefits?

• The parent company gets immediate cash — enhancing liquidity.

• The company may offer a cash discount (CD) for early payment, which offsets the interest cost for dealers — making it a win-win.

• Since collections are accelerated and supplier credits remain, this creates a healthy positive working capital cycle.

What to Watch Out For:

• Companies can opt for a pool-based disbursement method — where banks disburse funds after invoice validation.

• Negotiate hard with banks on:

  • FLDG (First Loss Default Guarantee) — try to reduce or eliminate it.

  • Interest rates — generally range from 9.5% to 10.5% for banks, and NBFCs may charge 1–2% higher.

  • Security terms and repayment flexibility.

Top players in this space include ICICI, SBI, HDFC, Axis, Vivatri Capital, Hero FinCorp, SG Finserve, etc. (Note: SBI tends to be more rigid in negotiations.)

Caution:

• Only extend this facility to credible and financially disciplined dealers.

• In case of dealer defaults, banks may demand supply suspension or even hold the entire pool at risk — so ownership and due diligence are critical.

• The parent company must honor its moral commitment to the bank and handle defaulters proactively.

Final Takeaway:

Use every financial sword wisely — and channel financing is definitely one of the sharpest when structured right. It can turn your receivables into immediate cash and free up working capital to fuel aggressive growth.