Understanding the need of new-age Supply Chain Financing

Working capital is the lifeblood of any business as it meets day-to-day operating expenses. However, it is often noticed that small businesses in India face the biggest challenge of maintaining sufficient cash flow for working capital requirements. The challenge is mainly related to managing receivables and payables meticulously to maintain a comfortable liquidity position. However, delayed payments or short payment terms often lead to shortages in liquidity. Small businesses are affected the most facing missed opportunities.

Supply chain financing (SCF) addresses these issues to the advantage of suppliers, buyers, and lenders. Traditional lenders like banks have forayed into the space, but in reality, they are reluctant to extend financing to new and small businesses in smaller cities due to concerns of credit risk, insufficient knowledge about the company’s business model, and the relatively higher cost of servicing small loans. This is because such firms lack the credentials and credit history necessary to obtain traditional funding. It is estimated that nearly 50% of the working capital demand in India comes from Tier 2 and Tier 3 cities in Gujarat, Maharashtra, and Uttar Pradesh while Tier 1 cities in states like Karnataka, Maharashtra, Tamil Nadu, and Telangana generate about 25% of the demand.

To solve the challenges faced by both enterprises and traditional lenders, mid-market enterprises are increasingly relying on non-banking financial companies (NBFCs) for SCF because they offer more flexible and customized financing solutions, possess a deeper understanding of the supply chain, and are more responsive to the customized needs of these enterprises.

How can the SCF solution benefit your business?

Benefits to sellers:

·?????? Improved cash flow

·?????? Reduced financial risk

·?????? Access to cost-effective financing

·?????? Strengthened business relationships with buyer

Benefits to buyers:

·?????? Extended payment terms

·?????? Better supplier relationships

·?????? Improved cash conversion cycle

·?????? Streamlined payment processes

How does the SCF solution work?

In India, there are two distinct approaches to SCF: -

1. Receivables-based financing: This focuses on leveraging accounts receivable as a means of obtaining financing. It involves using outstanding invoices or trade receivables as collateral to access immediate cash flow. This form of financing allows businesses to sell their unpaid invoices to a financial institution (or a factor) at a discounted value.
2. Loan-based financing: This method works on providing credit facilities against the current assets being financed. They are provided by financial institutions and are typically structured as revolving lines of credit both on the account receivable as well as account payable side.

Types of SCF solutions

1. Vendor financing: This ensures prompt payment for the vendors (suppliers to anchor). The anchor agrees to approve invoices for early payment by a third-party financier, who then advances the funds to the vendor. The full amount of the invoice is paid to the financier by the anchor on the due date. The programs include Sales bill discounting, Purchase order financing, Pre-shipment financing, Vendor Sales Factoring.
2. Dealer financing: This enables dealers to avail of extended credit periods to finance their purchases from anchors and boost their sales. This provides the dealer with flexibility in managing their payment obligations. The programs include Purchase Bill discounting, Sales Factoring, Revolving limits / loans.

What new-age SCF promises

The evolving technology landscape, improved data accessibility, and enhanced transparency in trade transactions are reshaping the landscape of SCF. Thanks to initiatives including the introduction of platforms like Trade Receivables Discounting System (TReDS), which streamlined the financing and discounting of trade receivables via multiple financiers, and the implementation of Account Aggregator framework, which facilitated suppliers and buyers in accessing various financing options in a secure and seamless manner. These apart, advancements in technology, such as blockchain, data analytics, and digital platforms, are revolutionizing supply chain finance and facilitating the following benefits to borrowers:

·?????? Automated process

·?????? Easy and digital process of documentation

·?????? Faster approval and disbursement

·?????? One-stop solution

Disclaimer:

The views provided in this blog are of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment