How Supply Chain Finance is a Key Source of Funding
By: Deepak Jain
In the emerging markets, transformation and disruption in technology is a boon. On the one hand, there is no shortage of ideas in investing the funds. It can be done using mergers and acquisitions, investing in various product lines, in the new markets and initiate new divisions, etc. On the other hand, understanding the source from where the fund arrives for the investments is the key.
Among the many ways, one way to raise funds is debt and equity, which are most suited to large enterprises, but these are costly, need a lot of time, and depend on the shareholders’ reactions. Other ways include accumulating funds by reducing the workforce or selling unwanted assets. Even minimizing capital investments is a wise idea. However, these things require a significant overhauling process in organizations, which sometimes leads to substantial organizational changes. Therefore these processes of raising funds are considered as the last option by most of the businesses.
Enter Supply Chain Financing
Supply chain financing has recently emerged as one of the best options for raising funds. Also called Reverse Factoring, it is the way by which the supplier gets the advance money for his supplies with the help of invoices presented by the buyers. These invoices are then provided to the banks or NBFC for the small discount, and then the capital is raised before the buyers’ credit limit matures. In general, the credit limit maturity ranges between 30 and 45 days. This unlocked money can be utilized for various purposes of funding.
The latest trends in the supply chain include shifting from the documentary trade and opening account for supply chain finance. Factoring and supply chain finance will grow in the coming years at a decent rate. Integrated treasury solution meets clients’ needs, and digitization of trade is the growing trend.
With these trends in supply chain financing, there are 3 ways to raise the capital, namely reducing inventory, reducing receivables, and increasing the supplies. Executing one or more of these methods can be done by choosing term negotiations, dynamic discounting, letters of credit (LOC), and factoring.
How Does Supply Finance Work?
- The supplier raises the invoices with the buyers for approval.
- Then the buyer approves the invoice, and they are uploaded on the website.
- Financiers provide the necessary funds to the supplier earlier than the maturity date or credit date. Usually, the credit is about 30 days to 45 days, which the buyers agree to provide money. However, in this case, the supplier will get advance money to their account from us. There will be a small processing fee, and the financing rate is not a supplier’s risk. The financing rate is based on only the buyer’s risk of buying from the suppliers. This type of financing rate is 10% cheaper than other financing options, such as factoring and loans. The supplier with advance payment for the goods or services from us will unlock the capital trapped in the supply chain into funding his other important programs.
- After the credit limit maturity period, the buyer pays the amount back.
Things to Consider For Supply Chain Financing
- Supply chain finance is not a loan
There is no financial debt to any party, it is the actual accounts payable for the buyers, and it is the sales of goods or services and thus actual payment receivables for the supplier.
- Multi-Banks or Multi-NBFC: This kind of supply chain finance is not tied to one funding institution; the suppliers or buyers can approach any institution in the network. However, our supply chain financing process is a simple online process, and we provide easy access to funds.
- It is not Factoring: It is not the same as factoring, but we call supply chain finance as reverse factoring. Thus the suppliers do not have any burden of loans; it is the actuals and 100% financing of the invoice minus a small transaction fee or the discount. There is no alternative burden for the suppliers.
- Any suppliers: Supply chain financing options are available not only for large corporations but to medium and small suppliers also.
- No Bank is Involved: The supply chain finance options do not involve large banks; fintech companies can give this credit to the suppliers. The financing can be shared by anyone of the following, namely the buyer, financial institutions, and the capital markets.
The Key Takeaways
- The Supply Chain Finance is an online option for both suppliers and buyers to get credit with lower transaction costs.
- The online option is business-oriented, technology-based, and improves efficiency.
- The main advantage of Supply Chain Finance is that it works well when the buyer has a good credit rating than the suppliers and thus provides much-needed access to capital at lower costs.
- There is an optimization of capital for both buyers and the sellers with short-term credit provided by us.
(The author is Co-Founder at FlexiLoans.com and the views expressed in this article are his own)