Product Distribution Channels and Financing Methods
Distribution Channel
The distribution channel is the means used to ensure that products move from producer to consumer.
- Own or Direct Channel: The production company goes directly to the customer.
- External or Alien Channel: Distribution of the product differs from the production company. It consists of brokers—individuals or institutions that allow the transfer of products. The length of the channel is expressed by the number of intermediaries involved, which may include wholesalers and/or retailers.
Channel Length Examples: Producers, wholesalers, retailers, consumers.
Short Channel Example: Producer, retailers, consumers.
Leasing (Finance Lease)
Leasing is a financing system through which a company incorporates an asset element in exchange for a rental fee. It involves three economic parties:
- The company-client that needs the good.
- The company that manufactures or possesses the good.
- The leasing company, which is a financial institution that finances the acquisition of the good and delivers it to the customer-company in exchange for rent.
The duration of the leasing operation generally coincides with the economic life of the asset. The rental payments incorporate the depreciation of the good, the interest on productive capital, administrative costs, and a risk premium for potential failure of the tenant companies. When the rental period ends, it is possible to return the property to the leasing company or purchase it at the price fixed in the contract.
The main drawback of this financing method is the high cost. However, many undertakings incorporate assets this way to avoid seeking external financial resources. Furthermore, the leasing fees can often be treated as deductible expenses for the company, resulting in lower taxable income and less tax paid.
Renting (Operating Lease)
Renting includes the rental of movable and immovable assets for the medium and long term. The tenant undertakes to pay a fixed monthly income for a determined period, and the renting company undertakes to deliver a range of services:
- Facilitate good use during the contractual period.
- Provide required maintenance for the property.
- Take out full insurance.
The rental income is a tax-deductible expense, and there is no minimum duration for the rental agreement. At the end of the contract, the tenant can substitute the equipment or renew the contract, but there is no possibility of purchase.