Supply chain finance is a way to fund your operation using the accounts receivable that other companies owe you from their purchases. Although every industry uses credit, it tends to be especially prevalent in industries like apparel. This is because many businesses operate on slim profit margins and maintain a high volume of sales. When you use supply chain finance to cover these transactions, you can free up cash flow for rent, payroll and inventory purchases.
WHAT IS SUPPLY CHAIN FINANCE?
Supply chain financing is a sort of cash advance based on the credit ratings of enterprises in the supply chain, similar to invoice finance. A lender will examine your supply chain and the credit risk therein, offering you the capacity to profit from the higher credit scores of your customers and extend your payment terms.
Supply Chain Financing (SCF) helps reduce the cost of financing that businesses typically have to pay when ordering raw materials and supplies to produce finished goods for sale. Supply Chain Financing allows businesses to take advantage of their own purchase orders, allowing them to use their own creditworthiness instead of that of their customers. This enables a company to either increase its profits or pass the cost savings back to its customers or both.
GROWING NEED FOR SUPPLY CHAIN FINANCE FOR BUSINESS:
The Indian SMBs are continuously looking for better, more convenient and cost-effective ways to fuel their business. In a country that has close to 6.8 Crore SMBs, this is one of the biggest markets for supply chain finance. This is one of the most exciting developments in India's growth story.
Supply chain finance helps the small and medium scale business units. This helps to provide accessibility to the funds. The entire process is seamless and hassle-free and provides an ideal financing solution to more businessmen in India.
The market for SCF in India is around Rs. 60,000 Cr. However, this is just about 10% of the total market potential, and there are no licensed manufacturers as of today. The value of invoices raised in India is an estimated Rs. 18 lakh Cr., which speaks of the immense opportunity we foresee for ourselves in India and globally.
HOW SUPPLY CHAIN FINANCE WORKS (WITH EXAMPLE)
Assume, a company ABC Pvt.Ltd. buys goods from XYZ Pvt.Ltd. Under normal conditions, the supplier, XYZ Pvt.Ltd., will send the goods to the buyers, ABC Pvt.Ltd., and then raise an invoice in the name of ABC Pvt.Ltd.
The buyer, ABC Pvt.Ltd., will receive the invoice of purchase, approve it, and send it for further procedure. The finance department of ABC Pvt.Ltd. will pay the payment after 30 days or after 60 days, whatever are the agreed credit terms of purchase.
However, what if the supplier XYZ Pvt.Ltd. After making the delivery and while waiting for the payment, gets another order, for which he needs money to buy raw material for the order. The seller may not entertain this request, and the buyer cannot risk spoiling his relation with a large corporate.
The supplier approaches the financial institution (like Mynd Fintech) affiliated with ABC Pvt.Ltd. for immediate payment in such a situation. If the request is approved by the buyer, the lender makes the payment to the supplier at a discount immediately. Not only that, it grants another 30 days to the buyer to make the payment, which the financial institution then collects from the buyer. This way, the buyer also gets an extended credit period for payment.