Understanding Dealer Finance

Overview

Businesses in India have been facing challenges to ensure even cashflows across the supply chain for years, especially those functioning in the retail, shipping and manufacturing sectors. While suppliers face delayed and longer repayment cycles, dealers struggle to make timely payments while managing their working capital needs. Hence, irregular cash flows cause payment shortfalls which affect business operations and growth opportunities apart from straining commercial relationships.

Interestingly, several lending institutions have come with innovative financing solutions to help businesses to narrow down cash flow gaps. Dealer financing is one of them. Read on to learn about dealer financing’s definition, operation, main advantages, and more.

Dealer Finance- What does it mean?

Dealer finance is a short-term credit arrangement that enables dealers to maximize their working capital. This can be done by purchasing goods on credit allowing deferred payment. Or by selling outstanding invoice balances on the specified date and settling payments with suppliers on time. It is instrumental in helping suppliers to obtain swift payments and helping buyers to repay liabilities at extended term without affecting working capital.

Typically, suppliers extend credit facility to the buyer (dealer) where the former acts as an intermediary either in the form of a credit facility or bill discounting. These financing alternatives assist organizations to maintain liquidity required to manage smooth operations. It also helps in closing the gap from purchasing inventory to generating revenues within the Supply chain cycle.

Key Features of Dealer Financing

1. Invoice-Based Financing- Credit facilities availed with respect to dealer financing are based on particular invoices with a pre-agreed repayment term which leads to an organized and transparent financing process. 
2. Business-specific Financing Options- Dealer financing offers personalized credit options including cost of interest, repayment term and loan sum. Affording flexibility enables businesses to customize financing choices to meet their unique requirements.
3. Minimizing Operational Risks- Securing dealer financing helps businesses reduce operational risks including late payments and inventory shortages. This consistency increases the supply chain’s overall efficiency.
4. Enhancing Business Relationships- A well-designed dealer financing arrangement helps improve ties between dealers and suppliers. Payments made on time and with consistent financing create confidence and collaboration throughout the supply chain.
5. Leveraging Corporate Creditworthiness- Dealer financing is also based on the creditworthiness of the larger corporate sponsor rather than the individual dealer. This greatly reduces the dealer’s costs of financing as compared to conventional business loans. 
6. Improved Supply Chain Resilience- Supporting dealer financial health improves supply chain resilience, resulting in a stable market and consistent supply of goods.

How Does Dealer Finance Work?

As previously stated, dealer financing is a three-party agreement involving the supplier, dealer, and financial institution.  A dealer finance agreement typically operates as follows:

1. Purchase Order Initiation-The dealer places a purchase order with the supplier to request products and services. In accordance with the purchase order, the supplier would deliver the products to the dealer.
2. Uploading an invoice- The supplier submits an electronic invoice to the lender or uploads it to the lender’s platform in order to initiate a financing request. The dealer will acknowledge the invoices presented by the supplier and confirm the amount owed to him.
3. Authorization- Lenders evaluate several factors such as credit limit availability, invoice veracity, and unpaid invoices before approving for dealer finance.
4. Invoice Settlement- On the due date as specified in the invoice term, the dealer is responsible for liquidating the outstanding invoice amount by paying it to the lender.
5. Disbursal of Loan Amount- Post completion of the authorization process, the credit amount is then disbursed into an escrow account that provides immediate access liquidity to the supplier. 

Benefits of Dealer Financing

Improved Supplier Relationships– 

Early payment to suppliers can strengthen the relationship between buyers and suppliers, leading to better collaboration and potentially lower costs.

Boosting Working Capital Efficiency- 

Dealer Financing allows businesses to fulfil their payment commitments without any impact on working capital. While suppliers get access to quick liquidity, dealers have a longer repayment term for debt repayment. It alleviates financial distress and frees funds to be applied for operational as well as investment needs ensuring long term business prosperity. 

Minimizing time and needless stress- 

Dealer financing simplifies the purchasing process by eliminating any need for approaching multiple lenders. 

Relaxed eligibility criteria– 

Stringent eligibility norms followed by conventional lenders might not lend to businesses with less-than-ideal credit scores. With invoice-based financing and supplier acting as anchor, dealer financing may help to avail low interest credit facility. 

Revenue Boost for Suppliers- 

Dealer financing boosts revenue growth for suppliers by offering financing alternatives which facilitates more clients, higher sales and attracts higher revenues. 

Documents Required to Apply for Dealer Finance

Particulars	Documents
KYC Documents	Proof of identification for the applicant or applicants (i.e.  passport, PAN card, or Aadhaar card).  Proof of registered address of the business.
Business Financials	Profit and loss statements (P&L) and statements of balance for two to three years prior.  Bank account statements over the previous six to twelve months.
Trade Documents	Copy of purchase orders (PO) or invoices from the suppliers that must be paid; Copy of agreements or contracts with the concerned supplier.
Business Plan and Projections	Copy of business plan, business profile and future projections.
Letter of Recommendation	A reference letter from a reputed supplier or corporation.

Common Challenges and Solutions 

Delays in approvals and disbursements- 

Dealer financing places heavy reliance on prompt approval and disbursal of funds by the lender involved. However, in case the lender fails to timely authorise or disburse funds, it may frustrate the lender as well as the supplier involved. 

Solution:

In order to prevent this, dealers should use automated procedures and maintain open communication with the lenders for prompt access to funds whenever required. 

Absence of Visibility and Transparency- 

Manual processes and disorganized platforms make it difficult for dealers to keep track of transactions and seek updates on the financing status. 

Solution:

However, advanced technologies assist manual processes to be automated through expandable cloud-based systems. It substantially lowers operating expenses and boosts the effectiveness of financial processes.Thus making dealer financing more robust.

Complicated Onboarding and Documentation process- 

Ineffective manual procedures for document collecting, verification, and loan approval may result in unnecessary delays and infuriation for dealers throughout the complex onboarding and documentation process. 

Solution:

Therefore, businesses should encourage use of SCF through digital onboarding processes and clear communication which improves the dealer experience and facilitates swift access to funds.

Credit Risk- 

In the dealer financing transaction, dealers are also exposed to the risk involved with their own creditworthiness while managing on time payments. 

Solution:

Therefore, implementing extensive due diligence techniques and utilizing AI-powered credit assessment tools can assist dealers as well as lenders regulate credit risk efficiently bringing financial stability. 

High Transaction Costs & Accessibility- 

Manual workflows, extensive paperwork, and the need for maintaining constant communication with several parties increases costs of operation and reduces efficiency for dealer business. 

Solution:

By using technology-driven solutions with ERP connectivity, dealers can increase their liquidity, offer early payment discounts, and gain continual insight into supplier activities.

Compliance and Regulatory Complexity- 

Dealers engaging in cross-border transactions face challenges to grasp complicated rules and compliances which makes dealer financing a time-consuming and expensive task. 

Solution:

Utilizing technologically driven multi-lender platforms and seeking expert guidance can help to negotiate attractive financing agreements, maximize working capital and acquire debt at favourable terms. 

Conclusion

Therefore, Dealer financing is a viable financing solution for businesses enabling effective cash flow management and optimizing working capital. Start-ups and SMEs facing financial difficulty to avail business loans from conventional sources due to lack of credit history could benefit from alternative financing options like dealer financing. Among benefits such as relaxed eligibility norms and swift loan disbursal, it is being viewed as extremely significant in the overall financial management of a business especially MSMEs.

FAQs 

What is dealer finance?

Dealer finance is a short-term credit arrangement that enables dealers to maximize their working capital and purchase goods on credit allowing deferred payment.

How does dealer finance work?

It works on a 3 party model where the supplier sends the invoice to the lender and the dealer confirms it. The lender pays the supplier. The dealer repays the lender on a later agreed date.

Can Dealer finance be used in cross border trade?

Yes, with the only drawback being increased compliances and documentation. Hence it is advisable to take expert guidance for the same.

Is Dealer Finance useful for SME and MSMEs?

Yes, it is highly beneficial specially in the cases where there is lack of credit history to avail other kinds of credit from the bank. It builds supply chain network and trust, giving immediate cash flow assistance to the SMEs.