All About Supply Chain Finance

All About Supply Chain Finance

In today’s day and age, there is no dearth of options when it comes to investing one’s funds as there are a myriad of options out there such as different product lines, new emerging markets, starting new divisions, mergers and acquisitions and many more. On the other hand, the source from where your funds for investment arrive is also vital here as even though there are multiple options available like equity, debt, etc that are more conducive to large companies, one cannot deny the fact that they are expensive, time-consuming and at the same time mostly reply on the reactions of the shareholders.

Other viable options for collecting funds could be saving funds by selling off unwanted assets, reducing unnecessary workforce, or substantially reducing capital investments. But one cannot overlook the fact that these processes involve substantial restructuring in the organisation, which is precisely why they are kept as the last option of raising funds by most businesses.

Now, this is where Supply chain financing comes into the picture as one of the best possible options for raising funds for any organisation. To start with, let us understand Supply chain financing in detail with respect to the overview and the way forward.

Introduction

Also referred to as Reverse Factoring, it is a way of funding in which the supplier will get the advance funds for his supplies through invoices that are directly presented by the buyer which are then forwarded to banks or Non-Banking Financial Companies (NBFCs), which in turn raise the required capital before the buyer’s credit limit expires. The credit limit ranges between thirty to forty-five days. Thus, this money can then be used for various purposes. This helps optimize the working capital for both the buyer as well as the seller as Supply Chain Finance (SCF) involves short term credit.

Also, the latest pattern for Supply Chain is gradually changing from physical documentation and creating separate accounts for Supply Chain Finance (SCF). Lately, it majorly involves the use of a technological platform with the aim to automate all the transactions as well as track the approved invoices and the settlement process, right from the credit payment to repayment on the due dates.

Who are the Stakeholders in Supply Chain Finance (SCF) and what is their role?

• The major beneficiaries and key decision-makers in the Supply Chain Finance (SCF) process are the manufacturers or corporates.
• The borrowers in Supply Chain Finance (SCF) usually are the Distributors, the Dealers, vendors, or suppliers.
• The major financiers in this process of funding are either the banks, financial institutions, or Non-Banking financial institutions (NBFI).

What are the offerings of Supply Chain Finance (SCF)?

There are two main types of funding that Supply Chain Finance (SCF) offers:

1. Upstream Finance, also called as Vendor Finance – this is when the banks or financial institutions provide invoice or bill deducting facilities to the vendors, suppliers or channel partners of large scale organizations for doing all the payments on the behalf of the corporate company to its suppliers for all the goods supplied by them to the said company.
2. Downstream Finance, also called as Channel Finance – This is where the banks or financial institutions will provide short term rotating loan facilities to the distributors or dealers (channel partners) of big corporate firms for the purpose of buying goods from the said company and then selling it ahead to its customers.

Benefits of Supply Chain Finance (SCF)

Advantages for Suppliers

• Early payment will ensure that financial dependence on the buyer is minimum
• Cost of capital will be reduced by supporting the buyer’s credit rating
• Cash flow is sure to improve
• Provides Work in Progress (WIP) financing and pre-shipment
• It ensures financial discipline is always maintained

Advantages for the Manufacturer and Corporate

• Working capital investments will be minimised
• The cost of goods sold will be reduced to an extent
• Total borrowing cost will go down significantly
• Administrative cost will go down, thanks to the automated process
• Better cash flow
• Stability of supply chain will be improved
• Supply chain financing ensures the availability of goods for end-users
• Sales will improve
• Financial discipline will be maintained

Advantages for the Dealer/Distributor

• Ensures good flow of working capital for buying inventory
• The cost of funds is less compared to other working capital products
• Short duration ensures financial discipline is maintained
• Administration cost will be reduced because of the automatic process

Advantages for the Financiers

• Risks will be diversified
• More opportunity for asset building and fee revenue
• Cross-selling opportunity – the process of evaluation of the need for money is made simpler because of the defined movement of goods
• There is a much lower risk of diversion of funds

Benefits across the supply chain process

Future opportunities with Supply Chain Financing

• Because of the current boom in the E-commerce industry, wherein the Indian economy is moving steadily towards online sales, it gives banks huge opportunity to fund various supply chains
• It gives banks a good opportunity to fund backward as well as forward integration in the value chain
• Flexible credit settlement is possible because of the focus being on shorter periodic assessments
• There is an opportunity for the launch of some common association or platforms for supply chain financing
• There is good potential of tapping into lesser exploited industries like electronics, commodities, consumer durables, FMCG &Agro industries to fund their supply chains.

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