As large corporate exporters seek to expand their sales in global markets, the issue of funding has become increasingly important. These companies are looking for ways to improve working capital resources in order to accelerate export growth and improve customer service. They are increasingly turning to local international banks for finance solutions that can help expand the capacity of their distributors and ensure increased access to marketing funds for enhanced sales activities.As a result, large firms are increasingly looking to their own banks overseas to help expand local sales by mitigating cashflow issues affecting distributors finance.
Did you know? A distributor is a company that acts as an intermediate in the distribution network or supply chain between a manufacturer, who produces a product, and a downstream company.
Overview On Distributor Finance
Distributor finance, often referred to as channel finance, is a revolving line of credit or term loan that is designed to fund the growth of an established distributor's business. The main purpose behind distributor finance is to provide the additional capital needed for a distributor's inventory purchases from the key supplier (the "anchor") of goods for resale in their market.A distributor financing program is ideal for accounts that require immediate funds, but can't meet their funding requirements through traditional bank credit lines. The best thing about distributor financing is that it's designed to help your organization grow. It provides you with a secured source of cash that can be used to purchase products or services. With this funding source in place, you can scale both your business operations and sales through expansion of your distributor network.
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How Distributor Finance Works?
The financial facility is often made available to the distributor (or buyer) of a significant manufacturer or exporter as direct financing in the form of loans or advances, subject to an annual review. Usually, these facilities are utilised to provide short-term liquidity for inventory and receivables.
Distributor Contractual Agreement
The risk is reduced by ensuring that the major manufacturer, frequently referred to as the "anchor party," is actively involved and exposed enough to encourage the distributor's contractual agreements to be carried out successfully. The anchor party and the finance provider might have a specific agreement.
Risk-sharing agreements could be used as an additional means of participation by the anchor party. Instead of obtaining finance purely based on the strength of its balance sheet, the distributor might be able to take advantage of better credit terms. Typically, the distributor is anticipated to have the qualities of a stable, well-established business with a track record of success in functioning as a distributor.
Agreement Between Distributor and Finance Provider
Normally, the distributor and the financial provider make a financing agreement or facility letter. Additionally, a master Distributor Finance Agreement between the anchor party and the finance provider is frequently present. This agreement will typically include the operating model that applies to the anchor party, distributor, and finance provider, as well as the terms of engagement for the finance provider to provide facilities for multiple distributors in some global territories.
Security
Given that this is a direct loan in the distributor's favour, the security is typically an assignment of the rights to the inventory and receivables and other types of security, as agreed upon by the distributor and the lender. Due to the likelihood that the borrower will be an SME, the typical risk assessment procedures concerning the sufficiency of security will be necessary. Through the large manufacturer's involvement, further risk mitigation is given. This might appear as follows:
- A master distributor finance agreement.
- Stop-supply letter.
- Buy-back guarantee.
- Comfort letter.
- Risk-sharing arrangement.
The value of the latter initiatives must be evaluated carefully because practitioners' assessments of their worth and the practicality of acquiring them often differ.
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Risk Associated with Financing
In addition to general risks associated with financing. There are several risks unique to Distributor Finance as follows:
- Due diligence in evaluating credit risk and ongoing monitoring help to reduce the distributor's default risk, including political risk. An essential consideration is the significance of the specific distribution deal to the borrower's ability to remain in business.
- Operational risks, particularly the need to coordinate several commercial and financial elements, are reduced by automation, management excellence, and business controls.
- Existing security arrangements have been reduced by waivers or the removal of them or by obtaining extra security.
- Monitoring and verification help to prevent collusion or distributor fraud.
- Due diligence on the part of the law mitigates a lack of authority.
A thorough audit procedure (in-person field investigations and visits to the distributor's office) would supplement the risk above mitigation measures. The model of the operating process could be manual, semi-manual, or automated using a platform of technology offered by the financial provider.
Benefits For Distributors
It offers the following to a distributor (or buyers) of a significant exporter or manufacturer:
- By maximising working capital, the distributor can close the cash gap between the cost of inventory and the money it receives from clients.
- Increased financing available to distributors, especially those with limited access to credit from traditional banking channels, based on the presence of real financial or commercial assistance from the major manufacturer.
- Distributors can get credit at a cheaper rate than they could get from conventional banking sources.
It might be possible for the huge manufacturer to generate increased sales. This enables the big manufacturer to extend the distributor's credit terms or to guarantee that more money can be raised with its assistance.
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Variation For Distributors
When a large manufacturer decides to enter into a Receivables Purchase facility with a distributor and extends or extends beyond customary credit terms to the distributor while serving as the seller, this is a variation of distributor finance. Due to the credit extension, the distributor is subsequently given liquidity to finance its order to cash cycle. On a mutually agreed-upon basis, the financial company can then offer the major manufacturer the means of financing the lengthier credit periods.
Other financing options, including factoring, leasing, invoice discounting, and standard working capital loans, which are not included here, might be made available to a distributor.
Conclusion
The concept behind distributor financing is that one of your anchor suppliers has a strong position in their market, but they may not have the liquidity with which to expand. Your company can provide them with inventory financing through your own internal supply chain partners and then provide even more value by leveraging their established network of distributors to help get these products sold into new markets.
Distributor finance is a financing tool that can benefit you if you are looking to expand your operations or to become a distributor yourself. Distributor finance has been around since a long time and continues to be one of the most popular commercial financing tools today.
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