Supply Chain Finance:

The trade and commerce landscape across the globe has undergone significant developments over the past decade. Especially, technological advancements and novelties in how transactions occur between the various parties involved have been instrumental in that regard. Supply chain finance (SCF) is a product of this revolutionising phase in trade and commerce that has simplified the flow of funds among the various links of a supply chain.

What Is Supply Chain Finance?

Supply chain finance is a broad term referring to a set of technology-based solutions that facilitate the reduction of cost and increased cash flow efficiency for both parties involved in a transaction.

This methodology encompasses the entire transaction process – from the sale of goods or services to the settlement of payment. SCF automates these processes for maximum efficiency. 

Essentially, it involves a supplier unlocking invoices approved by a buyer to gain access to funds before the due date. 

The governing ideas behind supply chain finance are – 

  • Buyers can prolong the repayment of their dues to suppliers, thus, optimising working capital
  • Suppliers can receive payments early on to improve their cash flow position

Thus, both parties benefit from SCF solutions. 

With KredX, you can avail funds against unpaid invoices via invoice discounting services within 24 – 72 hours* by uploading them at the online portal. 

What Are The Different Types of Supply Chain Finance?

Broadly, supply chain finance can be classified into two types – 

  • Buyer Initiated

Several reputed organisations such as Amazon have their own supply chain finance (SCF) programmes in place. Also known as supplier finance, it includes buyers making arrangements with lenders or have their separate division to make early or on-dated payments to suppliers against approved invoices. 

  • Seller Initiated

It is also known as reverse factoring. Here, a supplier/seller applies for early payment of bills approved by a buyer, minus service fee, from a third-party that is usually a financial institute. Such buyer repays the lending institution on the due date. 

Business owners can also opt for alternative financing options, such as invoice discounting, to meet their cash flow requirements. 

How Does Supply Chain Finance in India Work?

Here’s how a typical supply chain financing arrangement functions:

  • A supplier issues bills to a buyer against the sale of goods or services.
  • This buyer approves such invoices and uploads them on the SCF platform. 
  • The seller can view the approved invoices on that portal.
  • If the seller does not act, they receive the outstanding amount on the maturity date. 
  • Alternatively, the supplier can trade or leverage the approved bills with a financial institution to receive an advance payment.
  • The lender provides the value of such invoices less service fee to the supplier.
  • The buyer repays the lending institution on the due date. 

The financial institution thus acts as a payment buffer for a buyer under the SCF paradigm. That is because a financial institution allows an organisation to delay its payments while avoiding impacting its supplier.

What Are The Benefits Of Supply Chain Finance?

SCF provides advantages to both the parties involved in either side of a transaction. Here’s how:

  1. Instant Payment

In most cases, payment maturity periods can be as long as 90 days. Such a long term can affect the working capital of a supplier. With supply chain finance, however, businesses can release tied up funds by leveraging approved invoices. It stabilises their working capital position, allowing smooth day-to-day operations. 

  1. Better Repayment Terms

Suppliers can often demand upfront payment or ask for invoice settlement before the maturity date. If a buyer is to comply by paying from the working capital, then the business’s cash flow may suffer.

Supply chain financing solutions, on the other hand, allow businesses to delay payments without affecting the supplier. Thus, businesses can utilise their credibility to negotiate for better repayment terms.

  • Facilitates Optimal Working Capital Management

Both the seller and the buyer gain a beneficial foothold with early access to funds and delayed payments, respectively. It improves their supply chain finance flow, allowing them to upscale their operations efficiently.

Supply Chain Finance Vis-a-Vis Invoice Discounting:

Supply chain finance is a broad term denoting a comprehensive range of solutions that offer benefits to both the buyer and the seller.

On the other hand, invoice discounting can be seen as a subset of SCF. Here, businesses can trade or leverage the unsettled bills to avail the total value of invoices in advance, minus a service fee.

Another point of difference between SCF and Invoice discounting is that the latter involves a degree of confidentiality, whereas that may not be the case with the former. When opting for invoice discounting, businesses need not inform the buyer that their invoice is traded for availing advance cash. 

KredX, a leading integrated cash flow solutions provider, offers working capital against unpaid invoices within 24 – 72 hours*. Upload the bills at our portal to get quick access to working capital. 

What Are The Eligibility Criteria For Supply Chain Finance?

Supply chain finance does not involve any standardised criteria. Suppliers can avail funds in advance against unpaid bills based on the buyer’s credibility. Thus, a financier would offer cash advance if the buyer is sufficiently reliable.

What Are The Documents Required?

The primary documents necessary are:

  • ID and address proof of the business owner and the business
  • Ledger details of the debtor
  • Approved invoices

A lender would initiate payment after assessing these documents. 

Supply chain finance provides ample cash flow advantages to businesses. If utilised soundly, organisations can significantly benefit from it. It’s also important, in that regard, to turn to reliable institutions for supply chain finance. 

FAQs on Supply Chain Finance:

A. Blockchain is a composition of small blocks, which refer to pieces of information in this context, and chain, denoting an accessible database. With the technology, businesses can participate in transactions more securely since the corresponding information goes through a sophisticated process of storage. Once stored in the chain, it is accessible by all. Thus, it reduces risk, facilitates transparency, and improves confidence across parties.