Distribution finance refers to a set of financing arrangements that any manufacturer or any large scale distributor sets up to ensure seamless supply of goods within their addressable market.
This can be provided either to the manufacturer’s own subsidiary or to a separate local distributor that carries expertise in the target market.
An example of distributor finance:
Furniture importer “Imperial Furniture” in the United States imports luxury and designer furniture from a manufacturer “Enzo Furniture Manufacturers” in Italy.
Enzo furniture has given exclusive distribution rights to “Imperial Furniture” in the United States in order to increase its business.
Enzo furniture is reliant on “Imperial Furniture’s” domestic expertise and understanding of the American market and a seamless business operation for Imperial furniture is in the Enzo Furniture’s best interests.
However, as an importer or, even as a domestic sourcing company, managing distribution can be tricky and inventory management, cash-flow management and demand management become crucial aspects of running the business.
This is precisely the issues that distribution financing aims to solve and some of these financing solutions are listed below;
By far the most common type of distribution financing, this is a technique that is generally adopted by subsidiary companies that are controlled by the same parent entity but are legally distinct companies.
It is also a popular choice for vertically integrated companies, where the manufacturers have vested interests in providing convenient financing to their buyers.
In vendor financing, the vendor himself provides financing solutions to the buyer.
The vendor benefits due to an improved relationship with the buyer and the buyer benefits due to fixes in their cash-flow problems.
A system called dynamic discounting incentivizes the buyer to make early payments, in which case, the vendor may provide some relief either by way of a reduced financing cost or by way of a discount on the sales proceeds.
Financial institutions, after a thorough appraisal of a company’s financial accounts, can provide cash credit facilities to plug frequent working capital gaps.
This is generally a revolving line of credit facility, that allows companies to draw down only as much cash as needed in order to reduce financing costs as much as possible.
These are on-balance sheet transactions and generally involve tons of paperwork and documentation.
A final commercial invoice or a bill, that has been accepted by the buyer has a legal backing and can be used as an instrument to prove the receipt of trade receivables in the future, and can be used as an instrument to secure distribution finance in the future.
Also referred to as accounts receivable financing or A/R financing.
In this method, the borrower is essentially, securing a loan where the receivables are pledged as a collateral.
Such a borrowing facility is an on-balance sheet loan and can have an impact on the borrower’s credit score.
Drip Capital’s Channel Finance Solutions
Over the course of the last half decade, at Drip Capital, we’ve been successfully able to pinpoint challenges in distribution financing in the United States and our technology-enabled supply chain finance services are aimed at solving the issues that medium-large sized importers generally face.
Some of these advantages are:
- Competitive Pricing:
Our unique risk modeling helps us detect risky transactions and make safe lending decisions. Thus, we’re in a position to offer competitive pricing to all types of buyers in the United States
- High Credit Limit:
Importers with a healthy credit profile can secure as much as $2.5 million in credit, which is some of the highest limits provided in the Industry and a much needed relief to resellers.
- 48 Hour Disbursements:
Being in trade finance for more than half a decade, we understand the time-sensitiveness involved in international trade transactions. This is precisely why every customer has a dedicated account manager to handle business exigencies.