Risks

A) Financial Risk

Financial risk is normally any risk associated with any form of financing. It is associated with the financing company providing the facility to the corporate. This type of risk is covered under credit insurance just in case the customer gets bankrupt. Credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their Balance Sheet, Assets, Accounts Receivable, from loss due to credit risks such as protracted default, bankruptcy, etc. This insurance product, commonly referred to as Credit Insurance, is a type of Property & Casualty Insurance and should not be confused with such products as credit life or credit disability insurance, which the insured obtains to protect against the risk of loss of income needed to pay debts. Credit Insurance can include a component of Political Risk Insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc. The major companies providing Credit Insurance in India are ECGC, various Insurance Subsidiaries of GIC, ICICI Lombard etc.

B) Transaction Risk

Often channel companies with high levels of technical expertise are unable to realize the full potential of their capabilities due to lack of proper working capital. Smart financing can help them to grab new opportunities and manage the huge business growth happening today. It is said that the key to sustaining the high growth momentum is to manage good cash flows. Several channel partners sacrifice business opportunities due to working capital constraints. Channel financing can helps tackle this loss of opportunities. Finance options allow more transactions within a single credit cycle, helping the company grow faster. Moreover, it helps companies to move from a hardware-centric to a solutions-driven business and take on larger and complex deals. 

Companies for which a large chunk of our business comes from the government, where accounts receivable days are higher, they have to predict about their cash flows very carefully before bidding for such projects. With many companies moving up the value chain to increase their solutions and services play, managing cash flows has become imperative. When an organisation moves from corporate reselling to solution provision and as deal size gets bigger and more complex, availing financing options has become the need of the hour for many solution providers. Channel Finance has helped the several companies to get aggressive in taking bigger credit exposures, a requirement for bagging large projects. It has also enhanced their ability to service more deals.

Distributors too are aware of the need for channel financing and have introduced various programs to enable their key partners with tools to avail more financing options. In a recent study, those companies that avail channel financing have grown at a faster pace than those that don’t. Initially there was great difficulty in convincing corporates to use the option. But in the last two years over 150 companies have started using this scheme. At present banks prefer larger companies with proper balance sheets for bill discounting. Smaller companies are usually not given priority and have to pay higher interest rates. For such smaller companies NBFC’s and other financial institutions offer a variety of solutions or lower interest rates. 

Vendors too are doing their bit to help channels manage their internal finances better as well as empower them with customer financing schemes. Also with the integration of the Indian economy, most of the export payments are usually done through factors.  

Challenges 

A) While there are more options for corporates to raise finances than ever before, only a small segment of the companies is presently availing channel financing options. To be eligible for this facility, borrowers need to have strong financials and transparent reporting which is currently lacking among a large number of companies

B) Lack of financial planning is another issue compounded by the lack of qualified and experienced personnel to manage the finances 

C) There is also a misconception that availing loans will create an interest burden on the already dipping bottom-line. Contrary to this notion, availing finance will allow a company to carry out more transactions within a single credit cycle, thus reducing the total effective operating expense incurred per credit cycle

D) Availment of financing necessitates strong fiscal discipline. Once financing options are availed one has to get smart with the overall finance management. Forecasting of the working capital needs becomes paramount and clients have to ensure that bankers are paid on time lest credibility is lost and the ability to raise future finances is affected. Smart financing enables companies to improve their capabilities to benefit from new opportunities and speed up growth 

E) Even after RBI has given approval for products like channel finance, factoring etc there is a lot of non-cooperation from the banks regarding issuance of letter of disclaimer and Opinion reports. Further, banks offer multiple products as against limited facilities of financing offered by most of the NBFC’s which acts as a hurdle for the corporate to switch to NBFC’s for their financing requirement

G) The corporates don’t prefer channel financing as NBFC’s have a higher rate of interest than the banks due to their higher cost of funds. Other working capital products like overdraft facility, cash credit account, letter of credit etc. carry lower rate of interest

H) Lack of awareness about the product

I) Also one of the major challenges which corporate face is non-cooperation from there debtors and creditors