Supply Chain Finance in India: Meaning, Benefits and More
Uncertainties and risks are a part of the business. Every aspect of commerce is related to trusting people and processes that may be out of your control. In the wake of fluctuating market conditions, businesses often come across a shortage of finances. These shortages might be temporary but can hinder essential business operations. However, the market also presents ample opportunities for businesses to redeem themselves in terms of finances.
Financial assistance is not a new concept, and companies often look towards easy and reliable solutions to lend a hand in their production and purchase finance requirements. Supply chain finance is one such way that aids troubling businesses in times of financial shortages. It is a type of loan that helps a business conduct supply chain processes without worrying about running short of cash flow.
There are several supply chain finance companies in India that offer this facility for small, medium, and large-scale businesses. This process is highly streamlined, and easy to get a short-term loan processed. In the following blog, we will be delving deep into knowing what is supply chain finance, the types of supply chain finance, and the benefits of supply chain finance. So let us read on and enhance our knowledge about this concept of financial assistance.
What is Supply Chain Finance?
Supply chain finance is a process of availing financial help from financing institutions when a business urgently needs funds to carry on its operations. This process is a part of trade finance which deals with providing funds to companies to fulfill their working capital requirements.
This financing method is quite prevalent in the market, where payments from clients generally get delayed. To begin with, companies that do not have a lot of capital tend to feel trapped when clients and customers do not pay their dues on time. Then, even after the credit period expires, funds are not flowing properly into the company’s finances. This is where supply chain financing helps.
Let us look at an example of the same to get more clarity on the concept of supply chain finance.
Example of Supply Chain Finance
Following is an easy example to understand supply chain finance more clearly:
Company X sells goods to its clients and prepares an invoice for the same. The invoice has a 30-days credit period which is an ample amount of time to pay off dues. However, Company X cannot wait for the credit period to end and desperately needs money for working capital and supply chain operations.
To counter this issue, Company X sends the concerned invoice to lender Y for a discounted loan on the part of the invoice. Y will assess the invoice and lend money against it to X. Now when the 30-days credit period comes to maturity, Y will approach X’s clients and collect the payment for the invoices. As the lending company ‘Y’ directly approaches the client, there is no confidentiality in supply chain financing.
Features of Supply Chain Finance
Following are some of the features of supply chain finance:
- The goods and services are sold on a fixed credit period.
- The buyer approves the seller in getting financial assistance from a lender or financier.
- In the case of supply chain finance, the loan is used for working capital operations such as production, purchasing of raw materials, paying salaries, etc.
- For the proper functioning of the supply chain and its requirements, the business has a supply chain unit that finances the demand for funds from time to time.
- The process of supply chain finance benefits both the lender and the borrower.
- This process can also be done online for a faster supply of funds for the business.
How Supply Chain Financing Works?
Supply chain finance is a process in which a lender lends a part of the invoice to the borrowing business for the purpose of working capital requirements. The lender may be from the side of the client or customer for whom the invoice has been made initially.
This way, the client helps the seller or supplier to get financial assistance by getting them in contact with a financing company. The financing company must retrieve payments from the clients for the repayment of their loan. For the process of supply chain finance to work correctly, all the parties or stakeholders need to function in conjunction with each other. The three parties in question are:
- Seller (company or business who is the borrower)
- Buyer (client or customer who assists the seller with a loan)
- Financier (financing company that lends a part of the invoice)
Benefits of Supply Chain Finance
Following are some of the benefits of supply chain finance:
- First, supply chain finance helps increase the business’s cash flow by creating a constant flow of working capital.
- Helps in the continuation of production and other business operations
- Immediate fulfillment of finances for the purpose of working capital operations
- Easy loan processing and repayment conditions
- Reduction of administration costs due to being in complete control of business finances
- Loans under this facility can be availed at lower rates as compared to standard working capital borrowings.
- Operational costs of the business get reduced due to uninterrupted operations.
- Clients are able to avail a suitable time-period to pay their dues.
- The supply chain finance companies can diversify their risks with the help of short-term loans.
- Clients gain the trust of the seller by facilitating them to seek financial assistance.
Challenges of Supply Chain Finance
Following are some of the challenges you might face while going through supply chain finance:
- Lack of collateral makes the process of loan approval extremely doubtful and risky.
- With low-interest rates, supply chain finance companies in India cannot manage the costs related to retaining and maintaining funds.
- Due to being an unsecured mode of financial assistance, there is a possibility of fraud and misrepresentation.
- Borrowers are required to give out confidential financial information for the purpose of availing loans, which is always a risky thing to do.
Supply Chain Finance vs. Invoice Discounting
The following table shows the prominent points for supply chain finance vs. invoice discounting:
|Basis||Supply Chain Finance||Invoice Discounting|
|Confidentiality||There is no confidentiality as the customers themselves avail lender for the suppliers.||The company and the financier can maintain complete confidentiality.|
|Credit||The client or buyer has complete control of the credit.||The customer does not have control of the credit. The control lies with the seller|
|Payments||Payment collection is the responsibility of the financing company.||Payment collection is the responsibility of the borrower.|
|Financial limit||In the process of supply chain finance, a business can avail funds up to 80% to 85% of the total invoice value, regardless of its creditworthiness.||The financial limit in invoice discounting is up to 80%, given the business has a high credit score and has been in the selling business for at least three years.|
While supply chain financing and invoice discounting have some key differences, they also share some similarities. Both of these financing methods are fairly lenient in their eligibility criteria, and have a simple application and verification process. So, if your business operates in industries like manufacturing, recruitment, wholesaler, etc. they are ideal financing options to address problems like slow payment, cash flow crunch, etc.
In conclusion, supply chain financing must be opted for by companies with a history of insufficient working capital. Also, if you own a goods business and require continuous flow of money, supply chain finance can be a boon for your business. Make sure to know all the terms and conditions a financier requires before deciding on one for your working capital finance needs.
FAQs about Supply Chain Finance in India
Who all can avail supply chain finance?
Any private or public entity business can avail supply chain finance. Additionally, sole proprietorships and partnership firms are also eligible for this facility.
What is the repayment tenure of supply chain finance?
The financier decides the terms of repayment and tenure at the time of the loan agreement. However, most companies have one year tenure for loan repayment under supply chain financing.
How does a company providing supply chain finance calculate and finalizes the interest rate?
Credit limit and its utilization on the client’s part decide the interest rate calculation by a supply chain finance company.
What are the documents required to avail supply chain finance?
The following documents generally required to avail supply chain finance:
1. ID and address proof of the business owner
2. Identity and address proof of the business
3. Banks statement of the last three months
4. VAT statement for the previous three months
5. GST statement for the previous three months
6. Sales invoices for the previous three months
7. Sales ledger
How is the credit evaluation done for my business?
The credit evaluation of any business is done on the following basis:
1. The balance sheet of the borrower
2. Cash flow statements of the borrower
3. Business performance in the recent quarter
4. Prevalent market conditions
5. Inventory turnover of the business
6. Credit rating of the borrower