channel financing

Slowdown in the domestic demand for finished steel products has led to significant delay in settlement of payments. This has affected interest of many dealers and traders. In this difficult time, Channel financing has emerged as a savior for the trading units under stress. To understand how this tool helped dealers utilize their capital efficiently, Steel 360 visited Chennai. It is one of the major consumption hubs for Flat steel products with more than hundred thousand tonnes monthly consumption.

Our team interacted with prime dealers, traders, retailers & members of trading associations in Malayappan Street, Sembudoss Street & Thambu Chetty Street. More than 60 dealers & retailers trade here with each one selling more than 400-500 MT of Flat steel in a month. One common string that connects concern of each of these traders is massive delay in payments from their customers. The slumped manufacturing activities and poor domestic demand has led to significant irregularity in payments thereby affecting the dealers.

Payment issues are in fact eating into the profits of dealers and traders. During tête-à-tête with an importer and authorized dealer of JSW, it was learnt that the payment for orders were made in advance to suppliers, but delivery of the material took almost 17-18 days. For instance, a dealer placing an order of 100 MT has to pay INR 5.5 million to get the material which he would receive after 17 days. On the other hand, buyers/customers are unable to meet their payment obligations within 30 days. This locks in the capital within the system making it unproductive. Delay in the payment from customers increases interest on payments to the banks thereby impacting the margins of trading units.

Similarly, another dealer sitting in his office in Thambu Chetty Street quipped. “Trading is not a profitable business for us anymore. In fact we are acting as ‘Virtual financers’ for our customers. We offer discounts to customers who are able to meet their payment obligation on time. Infact, recently one of the major EPC contractors in Chennai defaulted on its payment to its suppliers/vendors.”

Is Channel Financing the way out?

Some of the dealers are resorting to Channel financing options to come out of this financial stress. Channel financing is one of the tools used by bankers for working capital finance to dealers and vendors who are associated with large companies for their business. Through this option, lenders/bankers have to find out ways how to finance the suppliers, manufacturers and dealers using different financial instruments. This option ensures an integrated solution for the entire supply chain, thereby supporting the financial need of the dealers.

The JSW dealer said, “Using this option, I am able to get multiple benefits from my supplier and able to utilize my capital better. Currently, we don’t have to make an advance payment for the material thereby saving interest payment during this period. Moreover, the delivery of material has been reduced to only 7-8 days through Channel financing as compared to 17-18 days previously. If the dealer pays back within 30 days, they have to pay only 13% interest. This interest rate can be reduced to 11% based on track record of payments. In addition, the dealers can enjoy extension of their credit limit upto INR 50-100 million based on their regularity of payment.”

In fact, many of the dealers are already reaping the benefits of Channel financing. This tool has empowered them to utilize their capital more productively in these times of difficulty.