Dealer financing is a type of financing mechanism that facilitates the smooth flow of goods and funds in a supply chain.
The mechanism of dealer financing works around three parties i.e., the supplier, the dealer, and the financial institution. This financing option addresses the cash flow needs of the suppliers and dealers and enables them to get funds in no time.
What is Dealer Financing?
Dealer financing is a financing arrangement that allows dealers or buyers to optimise their working capital by obtaining short-term financing to pay their suppliers promptly and liquidating the outstanding invoice amount on the due date.
It is usually provided to the dealers by their suppliers. Within this mechanism, the supplier extends credit to their dealers, essentially acting as an intermediary. It may be in the form of a credit facility or bill discounting.
What are the benefits of Dealer financing?
Dealer Financing offers numerous benefits to both the supplier and the customer (or dealer), making it a mutually beneficial agreement. The key benefits of dealer financing are listed below:
1.Time Savings
Dealer financing streamlines the purchasing process by eliminating the need for customers (dealers) to seek out a separate lender. This time-saving benefit simplifies and expedites the buying experience.
2.Assistance for Low Credit Scores
Dealers or customers with less-than-ideal credit scores often struggle to secure loans from traditional lenders due to strict eligibility criteria. Dealer financing can bridge this gap by suppliers facilitating loans as an anchor, offering lower interest rates. This enables the customers or dealers to make significant in-store purchases that might be otherwise challenging to obtain.
3.Revenue Boost for Suppliers
Dealer financing contributes to revenue growth by increasing the sales volume of the supplier. By offering financing options to dealers, suppliers can attract more customers and encourage them to make larger purchases, resulting in a revenue boost.
4.Enhanced Customer Experience
Providing financing options enhances the satisfaction and loyalty of the dealer. This improved customer service can lead to increased business for the supplier and positive word-of-mouth referrals.
5.Business Growth
Offering financing at the point of sale can lead to increased business volume. Studies have shown that dealers getting financing options through their suppliers or banks increases the average order value significantly. Additionally, dealers are more likely to capitalise on existing finance options to make additional purchases.
6.Revenue Expansion
Businesses that are provided financing options have reported substantial sales growth, with some witnessing a remarkable increase in revenue.
How does Dealer Financing Work?
Dealer financing in India involves a tripartite arrangement between the supplier, the dealer, and the bank, or financial institution. Here’s a breakdown of how dealer financing works in India.
Step 1: Purchase Order Initiation
The dealer initiates a Purchase order to request goods and services from the supplier. The supplier would provide the goods to the dealer based on the purchase order.
Step 2: Invoice Upload
The supplier initiates a request for financing by providing the invoice to the lender or uploading it electronically on the lender’s platform. The dealer accepts the invoices provided by the supplier. By this, the debt owed to the supplier by the dealer gets confirmed.
Step 3: Verification of various aspects
The lenders verify the various parameters including the availability of credit limit, the validity of the invoice, and overdue invoices.
Step 4: Disbursement of Funds
Upon successful validation, the financed amount is credited into the escrow account, providing suppliers with quick access to funds.
Step 5: Invoice Settlement
On the due date, specified in the invoice term, the dealer is responsible for liquidating the outstanding invoice amount by paying it to the lender.
Suggested Read:
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- 11 Top Reasons to get Equipment loan for Your Business
Frequently Asked Questions
How do suppliers benefit from Dealer Financing?
Dealer financing is a viable option for suppliers as the financial institutions that are generally hesitant to provide business loans to dealers because of their low creditworthiness do so in dealer financing.
Is dealer financing a form of supply chain financing?
Yes, dealer financing is a type of supply chain finance that facilitates the smooth flow of goods and funds in a supply chain.
To whom is the disbursement done in case of dealer financing?
The financing disbursement is provided by the lender to the respective bank of the supplier. However, the dealer repays the Financial Institution on the maturity of the tenor.
Can dealer purchases be financed against bills and invoices?
Yes, dealer purchases can be financed against bills and invoices.
What are the documents required in dealer finance?
The documents required in dealer finance are:
- KYC documents
- Invoice/purchase order
- A photocopy of the dealership License issued by the supplier company.
- Profit and loss statements and complete financials (past 2 years)
- Bank account statement (last 12 months)
