What is distributor finance?

Distributor finance is a type of supply chain finance that provides funding to distributors to help them finance their inventory and receivables. This can help distributors improve their cash flow and working capital, which can give them a competitive advantage. Manufacturers may also have the option to request early payment from the funder for invoices, in which case they will receive the full amount of an invoice from the funder, less cost of funds.

There are a number of different ways that distributor finance can be structured. In one common structure, a bank or other financial institution will provide a line of credit to the distributor allowing the distributor to extend their payment terms beyond the standard maturity date at a preferable cost of capital. This will be coupled with a direct agreement between manufacturer and funder which enables a more traditional receivables financing arrangement.

Distributor Finance works by manufacturers pairing their distributors with funders, opening a line of credit that is based on the manufacturer’s credit rating and extending payment terms. The funds are then paid by the funder to the manufacturer, giving the distributor more time to sell the stock and raise the capital to pay back the funder.

An agreement for the extended payment terms is negotiated between the distributor and the funder. This is then offered to the distributor as part of the fulfilment agreement with the manufacturer.

1. Distributor raises purchase order with manufacturer
2. PO submitted for approval based on limits.
3. For approved PO’s, manufacturer dispatches goods and sends invoice.
4. Invoices submitted to platform and checked against funding criteria.
5. Where manufacturer early payment is required, eligible invoices submitted to funders.
6. Funder provides payment for full invoice to manufacturer, less cost of funds.
7. If no extension required, distributor pays the funder full amount at maturity
8. Maturity date extension is requested by distributor, approved and all parties notified.
9. Distributor pays funder the full invoice amount at extended maturity.

Usually, a financing arrangement or facility letter is established directly between the distributor and the finance provider. Furthermore, it is common to have a primary Distributor Finance agreement between the main party and the finance provider. This agreement would outline the terms for the finance provider to offer facilities to various distributors in different global regions. It would also include any agreed-upon risk-sharing agreements and the operating model that applies to the three parties involved—the main party, the distributor, and the finance provider.

Distributor Finance is a great way for a large corporate manufacturer to ensure the security of their supply chain and to improve liquidity with their distributors. However, there are certain elements a supplier needs to consider before embarking on a Distributor Finance programme.

1. Increased financing dependency

By linking customer chains closer to funding, Manufacturers can increase volumes by allowing Distributors to access funds. However, manufacturers should consider whether they have the liquidity to support this increase so as not to put their Distributors at risk when large orders cannot be fulfilled.

2. Reporting capabilities

There are incremental reporting requirements that are needed to support this financing. Funders will need more information than under traditional financial arrangements due to wider pool of parties within the relationship and greater due diligence required therein.

3. Large network bias

The application of Distributor Finance tends to be most beneficial when all parties can leverage economies of scale within their supply network to negotiate the best possible rates from funders. The larger the manufacturer’s operations and by reflection their downstream network of distributor’s operations, the greater the opportunity in the eyes of the funding parties and thus the lower rates (and longer terms extensions) parties can negotiate.

Distributor Finance is distinguished from other supply chain finance solutions in a few key ways. Distributor Finance is specifically designed for distributors. This means that the terms and conditions of Distributor Finance are tailored to the needs of distributors, such as their need for short-term working capital and their desire to improve their cash flow through payment term extension that is sponsored by the manufacturer and provided by the funder.

Another key element to highlight is that both distributors and manufacturers can access funding through a distributor financing arrangement, distributors via extension, manufacturers via early payment. This creates significantly increased profit opportunities for the funding party through access to both sides of the trade and incentivises all parties to fully engage in the relationship.

In most other supply chain finance solutions, such as receivables finance and payables finance, there is a clear supplier and customer whereas in Distributor Finance, distributors are reliant on their customer base to fulfil their obligations, so they have the cash to pay back the funder. This adds a level of risk attributed against the manufacturer as the funding agreement is based on their credit rating. If a distributor fails to payback the funder, then this has an adverse effect on any future finance programmes a manufacturer would want to set up.