Supply Chain Finance

• Easy and faster way to secure working capital finance
• Benefits both the buyer and the supplier to meet their needs
• Biggest beneficiaries are the MSMEs
• Techno-business solutions are in place to manage the flow of working capital needs
• Individual Supply Chain Units to finance online as well as offline supply chain partners
• Process of raising invoice is online so that the borrower can avail credit immediately

How does Supply Chain Finance work?

There are 3 main stakeholders in Supply Chain Finance – 

The Supplier/Seller/Vendor

The Buyer

Bank/Finance Institution who is the Supply Chain Finance 

The seller raises an invoice on the buyer for the goods delivered. These invoices usually have a payment due in 30 days. However, when the seller is in urgent need of money, he sells the invoice to the Supply Chain Financer for a discounted price.

When the invoice becomes due, the financer collects the payment from the buyer at the full price. The financer stands to gain from the discounted price paid to the seller.

What are the advantages of the Supply Chain Finance system?

In this system, all 3 stakeholders stand to gain

For the Supplier or Seller

• He gets funds earlier than the invoice due date to utilize for his working capital needs
• Credit at lower rates than working capital loans
• Improved and certain cash flow
• Automation reduces operational costs

For the Buyer

• Longer time for invoice payment
• The funds can be utilized for working capital until the invoice is due
• Higher capital availability at lower rates than working capital loans or term loans
• Better asset acquiring 

For the Supply Chain Finance

• Diversification of risk
• Quick asset building and fee revenue
• Better opportunities for cross-selling asset
• Defined movement of goods allows for better evaluation of the need for money
• Clear end dues ensuing lower risk of diversion of funds

What are the challenges of Supply Chain Finance System?

The primary challenge facing this system is lack of awareness. Channel partners and suppliers are not very knowledgeable on the working of this system and its advantages resulting in lower usage. A few other challenges are:

• Banks face challenges in terms of available Capital & Liquidity. They are also required to follow strict regulatory requirements.
• Under developed Systems & Infrastructure (for KYC etc.)
• Low interest rates make it difficult for the financers to manage the cost of maintaining the funds
• Borrowers might divert the funds for other purposes
• There is no common platform for financers to collaborate 
• Lack of awareness has created concentration in a few selected industries only
• On boarding & monitoring of dealers/suppliers is difficult due to bigger geographies
• Unsecured lending is a risk factor

Some common instruments of Supply Chain Finance

Reverse Factoring: This method allows the sellers to sell their drafts, approved by the buyer, to a bank at a discounted price.

Inventory finance: The seller is allowed to hold the goods, reserved for the buyer, in a warehouse till the time goods are requested to be delivered.

Purchase order: This is an instrument or an order available to the seller for the order placed by the buyer.

What are the most common types of Supply Chain Finance services available?

• Letter of Credit
• Export and Import bills for collections
• Export Letter of credit advising
• Import and Invoice financing
• LC checking, negotiation, confirmation and safekeeping
• Performance bonds
• Pre-shipment export finance
• Shipping guarantees

What are the common documents required to avail Supply Chain Finance?

Though the document requirements vary from business to business, the most common documents are as follows:

• Identity Proof / Address proof for the owner as well as business
• Recent bank statements
• Recent VAT / GST documents
• Invoices for the last 3 months
• Sales ledger details for vendor

Supply Chain Finance FAQs: