A Comprehensive Guide to Supply Chain Financing for SMEs
SMEs cannot do well without supply chain financing, which becomes an indispensable need in order to have an efficient source of cash inflow, manage working capital properly, and sustain growth. Among the most remarkable solutions under supply chain financing include SME loans. This paper is an in-depth review of the role associated with SME loans in chain supply financing, with a particular focus on bill discounting as a financial tool that has proven ideal before many SMEs.
Supply Chain Financing
Supply chain financing can be defined as a battery of financial instruments designed to help companies maintain cash flow balance while managing supply chain operations. In the case of the SME sector, such funding will bridge the gap between the purchase of raw materials and the receipt of payment from buyers. Among the different modes of financing, SME loans are versatile and easily attainable for all sizes of businesses.
What Is an SME Loan?
The SME loan is a product of finance, specially dedicated to the small and medium enterprises. This can be used to buy inventory, upgrade machinery, expand operations, or even to run day-to-day affairs. Finally, obtaining an SME loan makes the funds for SMEs available with them much earlier and quicker, in case of a delay of payment from the buyers, thus ensuring that there are no financial glitches in running the business venture.
Importance of SME Loans in Supply Chain Financing
The normal nature of customers is the delay they usually create in making payments; this is the cause of liquidity problems in SMEs. In this context, the loans functioning as SMEs serve the purpose of a cushion that provides enough capital for general operation and does not let the operation be disrupted. Through SME loans, any business can ensure that its supply chain does not get hampered due to a lack of cash flow. Be it timely payment to the suppliers or meeting pretentious operational expenses, SME loans are part and parcel of an effective supply chain financing strategy.
Bill Discounting: A Major Supply Chain Financing Tool
Of the different solutions available for supply chain financing, bill discounting is the most popular, especially among small and medium enterprises. Bill discounting can be compared with the process of selling unpaid invoices to a financing institution at a deduction and thereby getting funds right away without waiting for the buyers to make the payment. It is a particularly good method for SMEs which rely heavily on getting their goods and services sold on credit.
Bill discounting can be regarded as an excellent substitute for traditional SME loans; it empowers businesses to release the money blocked in their receivables. In this way, it comes as an advantage over SME loans, where businesses are supposed to borrow by pledging the future cash flow. In Invoice discounting, it is possible to arrange short-term funds based on near-cash invoices of the companies.
How Bill Discounting Works
Invoice Generation: The SME raises an invoice to its buyer for goods or services delivered.
Also, the SME, having the invoice in hand for a bill discounting, has to now approach a financial entity, like KredX.
On Assessment of Invoice: Once an invoice is handed out to the discounting company, typically, it values; fund release will be equal to a given percentage of the amount mentioned in the invoice, which generally stands between 80 per cent to 90 per cent.
Settlement: Upon the settlement date of the invoice, the financial institution receives the settlement amount, deducts a petty fee for its services, and returns the balance amount to the small and medium enterprises.
Advantages of Invoice Discounting on SMEs
The discounting of bills offers quite a few benefits to small and medium enterprises. It is a most convenient choice for companies which would wish to have a workable credit process for controlling their cash flow:
Quick Cash: Funds can be availed by the SME almost instantaneously and do not have to wait for the buyer to make a payment.
Better Cash Flow: This method helps an SME to realise its cash from receivables and hence maintain its business.
No Further Debt: In contrast to traditional loans for an SME, through bill discounting, there is no added liability to the company, as it is not a loan but a sellout of its receivables.
Flexible Financing: Bill discounting allows SMEs to manage the variability of cash flow that is involved in seasonal fluctuation without bearing themselves with long-term borrowing.
How SME Loans and Bill Discounting Work Together
While SME loans grant the capital required for business growth and operations, invoice discounting focuses more on improving liquidity by increasing the degree of monetisation of the invoice. Even though both financing devices are used and can work hand in hand, an SME may take out a stronger, robust financial strategy. For example, an SME would raise an SME loan for long-term growth projects but would use bill discounting to meet its daily cash flow needs.
KredX is one of the leading providers of Invoice discounting solutions in India that helps SMEs to unlock the potential of their receivables in order to maintain a good cash flow. KredX helps SMEs release funds quickly and without any hassles so that they can optimise their supply chain and scale up operations effectively.
Selecting the Right Supply Chain Financing Solution
Small business houses need to reflect on the following factors when opting for a bill discounting facility over SME loans, depending on their financial needs and goals set by them. While SME loans would be relevant to businesses that intend to have long-term capital to finance the expansion of their business, invoice discounting would be a good fit for this purpose in situations where you have a problem with the current liquidity support.
Considerations would actually include:
Cash-flow Requirements: If your business struggles with frequent payment delays, bill discounting can bring quick relief by releasing blocked funds in receivables.
Growth Plans: For blooming businesses, expansion plans or establishment of new ventures, the SME loan will score better.
Creditworthiness: More emphasis is given on the creditworthiness of the buyer under bill discounting, but for an SME loan, it is the health of the borrowing firm in financial terms.
Conclusion
In conclusion, supply chain financing plays a very important role in the growth and sustenance of the SME. Whether they have been working capital loans for the SME or bill discounting, the businesses have ensured a healthy cash flow, particularly of working capital, in meeting their growth objectives.
Bill discounting can be a very useful and diversified path for the majority of SMEs, which are usually engaged in business involving sales on credit with a longer line of credit, in making sure that the liquidity is maintained but without further commercial borrowing. With support for expansion as one of the prime benefits, SME loans can make no other SME in the world meaningfully sustainable in SME financing.
If you are the owner of an SME, KredX is at your service with our array of supply chain financing solutions. Bill discounting gives you quick access to funds, while our customised SME loans will always have your back.
Unlock your business today with KredX financing solutions made just for you. Whether it’s a reliable SME loan or instant liquidity by way of bill discounting, KredX is by your side on this business growth journey. Get in touch with us now to learn how we can help your SME thrive!
