Supply Chain Finance Bridging The Funding Gap For Small Businesses

What Is Supply Chain Finance?

Supply chain finance refers to tech-based integrated solutions that assist reduce financing costs while increasing company efficiency for both buyers and sellers in every sale transaction (SCF). Supply chain finance works from the beginning to the end of every transaction, with the goal of completely automating the tracking and transactions. Supply chain financing has been shown to be beneficial to all parties involved. It allows purchasers to authorize the financing of suppliers’ bills by a financial company (known as factors) and the supply of working capital through a short-term credit facility, allowing both parties to have more liquidity. Another facet of these advantages is the increased leverage for purchasers in terms of time to pay their dues.

Due to the enhanced liquidity, both parties on both ends may use this speedy money availability to fund fresh projects as well as seamless maintenance and operation of current ones. 

How Does Supply Chain Financing Work?

Supply chain finance is accomplished using the Invoice Discounting process, which is summarised below:

1. KYC and due diligence are performed on both sellers and debtors to ensure that they are appropriate for supply chain finance.
2. The invoice is subsequently sent to the selling party’s debtor, who then sells it to a financial organization.
3. As a safeguard against the debtor defaulting, the financial organization releases around 80% of the money rather than the entire amount.
4. After the debtor has paid the entire amount of the invoice, the funds are transferred to the financial entity’s account upon maturity.
5. Finally, the seller receives the remaining 20% from the middleman.

The following is a more detailed breakdown of supply chain financing funding:

• The supplier issues an invoice to the customer.
• The lender obtains confirmation of the buyer’s payment permission.
• The financial institution delivers the provider approximately the whole (but not the entire) sum.
• When the payment due date approaches, the buyer pays the financial body.

As a result, under supply chain finance, the cash flow is smooth since the supplier receives payment within a few days rather than having to wait for a long period until the due date. On the other side, with a longer payback period, customers may continue with their business while maintaining their relationships with suppliers unhampered. 

Supply chain finance: features and benefits

Features Of Supply Chain Finance

• Has short-term credit and loan providers that can be used as working capital or to purchase shares.
• Collateral is no longer required, and your equities serve as collateral.
• Loans are easier to get than traditional methods of acquiring loans ranging from 10 lakhs to 20 crores.
• The funding process is completely tailored to each company’s procedures and cycles.
• As a consistent operating cash source, it provides a smooth short for seasonal demands.
• Allows each firm to arrange inventories according to their individual needs.
• The tenor has a lot of range.

Benefits of Supply Chain Finance

Balancing your company’s demands with those of your suppliers is at the heart of any effective supply chain finance program since it benefits you both in the short and long run. Let’s look at some of the advantages of supply chain finance:

Benefits for buyers

On the one hand, your suppliers will want to get payment from you as soon as possible, and on the other hand, you will want to secure a payment extension for the bills with you. Supply chain financing may benefit both parties by assisting providers in receiving their due amounts sooner and allowing purchasers to extend their payment deadlines. The following are some of the benefits of supply chain financing:

• Working capital improvement: Supply chain finance allows for improved cash mobility as well as shorter payment cycles, allowing for better working capital.
• Supply chain risks are decreased: As supply chain finance becomes cheaper, the chances of the chain being disrupted are lowered significantly.
• Stronger and stronger supplier connections: Supply chain financing enhances suppliers’ access to operating capital and, as a result, is an excellent instrument for bolstering supplier relationships.
• Advantage during negotiations: Suppliers might use supply chain finance to leverage commercial terms.
• Stronger business growth: Supply chain finance puts your company in a far better position by assisting suppliers in meeting demand via new investments.

Benefits for suppliers

Suppliers enjoy numerous benefits from supply chain finance just as buyers do, some of them are:

• Benefits from easily available working capital: By making early payments, suppliers may use the available working capital to build up their position.
• Less expensive funding: Because supply chain finance does not use standard credit scoring methods, the cost of financing suppliers is less expensive.
• Improvements in cash flow: As previously said, as cash liquidity improves, suppliers are able to invest more in new or current projects.
• Better cash flow forecasting: Having a better understanding of finances and payments will help you develop clearer and more precise estimates.
• Having access to a user-friendly platform: You may have complete visibility of all transactions and simple access to them with supply chain finance services.

Supply chain finance: Interest rates and fees 

Lenders often offer supply chain finance at a fixed proportion of the invoice amount, which can range from 75 percent to 90 percent. Invoice discounting facilities typically range from 1.5 percent to 3 percent.

How is supply chain finance different from trade finance?

Supply chain finance:

It’s similar to invoice factoring, except that the buyers start the process by picking which invoices to pay, and then only the supplier may decide which invoices to cash out first. As a result, rather of working independently, all three parties collaborate.

Trade finance:

Trade finance, like supply chain finance, necessitates cooperation among the three parties involved. The financial entity is critical in assisting them in encashing the duties and completing the necessary papers to handle the billing. In trade finance, the seller’s bank can also advance loans and advances based on trading contracts.

Supply chain finance by various vendors in the market

The Reserve Bank of India has given supply chain finance solution providers permission to set up and run supply chain finance, which has digitally revolutionised the process of obtaining working capital for MSMEs through invoice discounting through numerous financiers. TReDS is a solution to the MSMEs’ perpetual cash flow problems in India, as well as an efficient way to propel the MSME sector into the next phase of the Indian economy.

The Department of Micro, Small and Medium Enterprises issued a notification on November 2, 2018, stating that all companies registered under the Companies Act with a turnover of more than INR 500 crores, as well as all Central Public Sector Enterprises, must use the TReDS platform, making TReDS registration mandatory. The competent authority to oversee compliance with this notification has been designated as the Registrar of Companies (RoC) in each state.

– MSMEs have easier access to credit, with lower interest rates and no need to put up additional collateral. Furthermore, the MSMEs have no recourse to the loan.

– Companies save money on procurement by negotiating better financing arrangements with their providers.

– On Trade Receivable Exchange systems like M1xchange, financiers may develop PSL asset portfolios.