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Distributor Financing and the Path to Inclusive Economic Development

The success of a business that involves distributing physical products relies on its ability to distribute or deliver products to customers quickly. From food and electronics to pharmaceuticals, retail, or even automobiles, a robust supply chain is the backbone that keeps businesses running and enables seamless operations in a wide range of industries. This is where Distributor Financing emerges as a vital enabler, providing critical support to distributors of large manufacturers to sustain the supply chain.

Understanding Distribution Financing

Also known as Buyer Finance or Channel Finance, it revolves around providing distributors funds to cover the holding of goods for resale and mitigate the liquidity gap until they receive payment from retailers or end customers. This financing model targets smaller or local distributors who often need help accessing traditional funding sources due to limited credit availability or timing disparities in cash flow.

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Growth of Distribution Finance

India's supply chain finance (SCF) market size is expected to grow at a CAGR of 8.42% during the forecast period between 2023 and 2029. Along with SCF, the distributor finance (a part of SCF), demand will also grow. The increasing number of SMEs in the country is the major factor driving the need for distributor financing in India. According to the Ministry of Micro, Small and Medium Enterprises (MSME), India has over 63 million SMEs. These SMEs play an important role in the Indian economy, accounting for over 45% of the country's GDP.

Bare Bones of the Workflow

The essence of Distributor Financing lies in the partnership between large manufacturers (anchor parties), their distributors, and finance providers. The finance providers extend loans or advances directly to distributors, secured by rights over inventory and receivables. This direct financing approach helps mitigate risks and ensures a close engagement between the anchor party and the finance provider, leading to more successful contractual arrangements.

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Types of Distribution Financing Models

  • Channel Financing: Converts invoices into cash, ensuring uninterrupted supply chains, scaling operations, managing inventory, and strengthening business-customer relationships
  • Vendor Financing: Suppliers provide financing to distributors, enabling them to stock and sell products without upfront payment, manage cash flow, and expand their network
  • Factoring: Selling accounts receivable at a discounted rate to a third party, providing immediate cash flow and reducing credit management burden
  • Inventory Financing: Using inventory as collateral to secure financing, ensuring working capital availability for operational needs, especially useful for businesses with seasonal fluctuations
  • Trade Credit: Suppliers extending credit terms to buyers, allowing upfront goods or services delivery and deferred payment, facilitating cash flow management and working capital requirements

These financing models support supply chain growth, capital access, inventory management, and relationships with suppliers and customers.

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How does Distributor Finance benefit Supply Chain Management?

  • Uninterrupted Supply Chain
  • Efficient Inventory Management
  • Instant Access to Funds
  • Stronger Business-Customer Relationships

Big Shots in the Indian Market

Some of the leading Banking and NBFC providers of supply chain finance and distributor finance in India 2023 are:

Banking

  • HDFC Bank
  • IDFC Bank
  • Kotak Mahindra Bank
  • Axis Bank

NBFCs

  • Bajaj Finserv
  • Flexiloans
  • Indifi
  • Lendingkart 
  • Tata Capital 
  • U Gro Capitals 
  • Adani Capitals 

Driving Growth: Ashok Leyland and IDBI Bank's Channel Financing Partnership

Ashok Leyland, India's leading commercial vehicle manufacturer, has announced its partnership with IDBI Bank Ltd. to provide customized financial solutions to its dealers through channel financing (distributor financing). The collaboration will utilize IDBI Bank's e-supply chain financing (e-SCF) tool, enabling Ashok Leyland's dealers to access working capital quickly and easily. This digital solution eliminates complexities and delays associated with traditional paper-based financing, empowering businesses to manage cash flows effectively and accelerate growth. This partnership reflects the transformative impact of channel financing in enhancing operational efficiency and driving business expansion.

Answer to Small Cities' Capital Crunch?

Accessing capital can be a daunting challenge for sellers and retailers in tier 2 and 3 cities. Despite the growing market potential, small businesses in these cities often need help securing financial support. A BCG report highlights that a significant portion of online shoppers, currently at 50%, resides in small cities, with projections indicating a rise to 60% by 2030. This surge in traffic from tier 2 and 3 cities to digital aggregator sites has fueled market growth.

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However, banks and financial institutions need to be more cautious about lending to MSMEs in these areas due to the lack of collateral and proper financial record-keeping due to the Kutcha book culture. The conservative lending practices and stricter guidelines adopted by lenders for tier 2 and 3 cities further exacerbate the problem, as these regions are not as commercially bustling as major cities. Finding effective solutions to bridge this capital gap is essential to support the growth and success of small businesses in these untapped markets.

How Tech Can Help Financiers Reach Deep in India

Innovative technologies play a pivotal role in the success of Distributor Financing. Web-based platform solutions provided by global finance providers enable seamless communication and collaboration among anchor parties, distributors, and finance providers. These platforms facilitate purchase order approvals, invoice confirmations, payment tracking, and drawdowns, streamlining the transaction process. Moreover, Automation, Data Analytics, and Artificial Intelligence empower finance providers to assess risk, monitor performance, and make informed financing decisions.

Balancing the Tightrope: Challenges and Solutions

Potential Risks

  • Distributor Default
  • Diversion of Funds
  • Operational Risks
  • Pre-existing Security Arrangements

Mitigation Methods

  • Continuous monitoring
  • Risk Assessment
  • Communication Between Distributor & Finance Provider

Best Practices

  • Robust Audit Processes
  • Legal Due Diligence
  • Latest & Safe Technologies 

Latest News: Going Global is Helping India to Have a Bright Future

The future of supply chain finance in India appears promising, with leading Taiwanese technology firms considering relocating their manufacturing bases to reduce their dependency on the Chinese market. This potential shift opens up significant opportunities for collaboration between India and Taiwan in emerging technologies, particularly in semiconductors and electronic equipment manufacturing. India's large domestic market and strong software capabilities make it an attractive destination for investment. As Taiwanese companies explore manufacturing in India, there is a potential for complementary collaboration between the two countries in the ICT sector. The strategic move by Taiwanese firms reflects the growing importance of supply chain finance in fostering economic ties and enhancing global trade opportunities.

Parting Words

The implementation of distributor financing presents a crucial opportunity to empower rural MSMEs and FPOs by providing them access to digital SCF platforms. By embracing supply chain financing, these businesses can effectively address their working capital challenges and unlock their growth potential. The agricultural sector, in particular, holds immense credit demand and opportunities. Offering lending solutions can incentivize farmers to embrace digitization across various activities, ultimately leading to a ripple effect on GDP growth. As we navigate the evolving landscape of finance and technology, leveraging distributor financing to bridge the gap in rural areas can pave the way for inclusive economic development and financial empowerment.

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Distributor Financing and the Path to Inclusive Economic Development

Purvai Soni
,
Ankit Abhishek
,
Yatharth Chaudhary
Yatharth Chaudhary
  • January 23, 2024
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