Small businesses in India often struggle with managing their working capital. The need to maintain a steady supply of raw materials while waiting for payments from buyers can create financial stress. Channel financing offers an efficient solution by providing credit to MSMEs based on their supply chain transactions. This guide explains the fundamentals of channel financing, its benefits, and how JSW One MSME Credit can support your business.
Understanding channel financing
Channel financing is a short-term funding mechanism that enables suppliers and distributors to maintain a steady cash flow. It involves financial institutions providing credit to businesses against invoices or purchase orders. Unlike traditional loans, which are based on a company’s financial history and collateral, channel financing focuses on transaction flow within a supply chain. This form of financing benefits all stakeholders—suppliers receive timely payments, buyers get extended credit periods, and financial institutions mitigate risk by leveraging trade relationships.
How channel financing works
- A supplier delivers goods to a buyer and issues an invoice.
- Any financial institution steps in to finance the invoice.
- The supplier receives early payment, improving cash flow.
- The buyer repays the financial institution at an agreed later date.
- The financial institution earns revenue from interest or fees on the transaction.
Types of channel financing
- Supplier financing: The supplier receives early payments from a financial institution while the buyer pays later.
- Buyer financing: The buyer gets credit to purchase goods, helping manage liquidity without delaying payments to suppliers.
- Dealer/distributor financing: Financial institutions provide credit to distributors or retailers, allowing them to stock inventory without immediate capital outflow.