Importance of Deep Tier Financing

Supply Chain Management is a relatively new concept that emerged with globalisation's emergence. Due to higher competition and increasing supply, profit margins decreased, and companies started to search for more economical and sustainable production methods.?

The process is called the "supply chain," from the primary suppliers to sales returns. Its administration is known as Supply Chain Management, with distinct expertise needed for each segment;?

• Supply Management?
• Production Management?
• Distribution Management?
• Logistics Management and??
• Supply Chain Finance?

Supply Chain Finance, although some call it financing the leading producing company's first-tier suppliers, covers the whole supply chain’s financial activities, even credit card sales of retailers.?

Basel Accords led banks to concentrate on financing the largest company in a supply chain due to risk reasons. Smaller companies and SMEs had to find alternative solutions for their financial needs.??

Larger companies had the opportunity to find very cheap funds due to the high competition of banks in this smaller market of big institutions. On the other hand, small companies needed help finding such cheap funds in smaller groups of finance suppliers.?

The different paradigms and applications of finance companies mainly cause this. Banks generally give credit to their clients for some time and get some collateral to guarantee the return of their money. For such loans for them, the user and the repayer are the same. Because of this, the client must be sustainably powerful.?

What about the suppliers or the suppliers of the suppliers (deep tier suppliers) of the leading company in a supply chain??

They may not be sufficiently powerful for banks to finance them directly, but they have financially robust customers. Addressing this issue became imperative. The concept of first and deep-tier supply chain financing emerged as a solution.?

Post-shipment financing Instruments like Factoring, Reverse Factoring, Islamic Supplier Finance and Commodity Murabahah, even forfaiting, etc., finance deep-tier suppliers.?

In deep-tier financing, a financial institution pays a company, generally a smaller one, and gets the repayment from a larger, actually credited, more credible one.?

With minimal risk and lower financing costs, the supplier's pricing will be reduced, leading to decreased supply costs for the main company.?

As we are talking about receivables finance, the receivable collection period will decrease, and deep suppliers will have better liquidity. Under the assumption of unlimited turnover, production and profitability will increase for the whole supply chain.?