Supply Chain Finance With Benefits & Examples - MyndFin

To ensure that they can maintain good relations with their customers, all firms should employ a credit system. However, if nine out of ten transactions are made on credit, the company will face cash flow problems. This may also have an impact on your inventory purchases and rent payments; one way to deal with this situation is to use supply chain finance.

WHAT IS SUPPLY CHAIN FINANCE?

 Supply chain financing is a cash advance based on the credit rating of enterprises in the supply chain. It allows small businesses to profit from their customers' higher credit scores while also extending payment terms. Supply chain financing frees up working cash that has been tied up in the supply chain. Trade finance includes a section called supply chain financing. Supply chain financing is a collection of services provided to medium- and large-sized businesses; most frequently these are loans, purchasing order finance, factoring, and invoice discounting.

 Supply chain finance refers to a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. While all these funding techniques help a business get funds to manage its cash flows, there are salient differences between them.

GROWING NEED FOR SUPPLY CHAIN FINANCE FOR BUSINESS:

 India and all over the world, there is an increasing need for supply chain finance. In India, there are more than 6.8 Crore small and medium businesses, and most of these businesses are always looking for better, convenient, and cost-effective ways to get funds. Encouraged by several supply chain finance companies, these small scale business units actively use supply chain financing. This has led to a huge growth in demand for supply chain finance. In India alone, the current market size is around Rs. 60,000 Cr (INR 600 billion), and this is just about 10 percent of the total market potential. Based on the value of total invoices raised in India, the market size is estimated to be Rs. 18 lakh Cr (INR 18 trillion). These figures speak of the enormous potential SCF has in India and even globally.

HOW SUPPLY CHAIN FINANCE WORKS (WITH EXAMPLE)

 Supply Chain Finance (SCF) is a financing technique that enables companies to obtain cash flows from the suppliers or buyers before they actually receive payment for their invoices. The sellers sell the invoices to a financier and get paid at a discount. In this process, the buyer’s credit rating plays an important role as lenders feel more comfortable paying the invoices raised to large corporates and MNCs as there is no risk of defaulting payment. This gives the buyers a lot of bargaining power, and they can negotiate better terms with the sellers regarding product price and payment schedule. The buyer is also encouraged to produce and deliver quickly as he is assured of immediate payment from his financier.

LET’S UNDERSTAND THIS ENTIRE PROCESS WITH AN EXAMPLE.

 When a company, ABC Corporation, purchases goods from XYZ Limited, the supplier usually sends the invoice directly to ABC Corporation. The buyer then approves and forwards the invoice to their finance department for payment. The finance department waits 30 days or 60 days—whatever are agreed upon as credit terms—before releasing payment to XYZ Limited. However, if XYZ Limited gets an additional order before receiving payment for its previous sale, it may not be able to accept more work until it is paid for previous orders.

 In such a situation, the supplier may approach a financial institution (lender) affiliated with ABC Corporation for immediate payment. If the request is approved, the lender makes the payment to the supplier at a discount immediately. Furthermore, it grants another 30 days to the buyer to make the payment, which it then collects. This way, both parties can get an extended credit period.

WHO BENEFITS FROM SUPPLY CHAIN FINANCE?

 This procedure serves multiple ends and is beneficial to all parties involved—the supplier, the customer, and the financial institution.

 Supplier: The supplier gets fast access to the money outstanding and can source raw material for the next order or pay his other liabilities. This makes the company's cash flow more smooth and streamlined. The supplier can again repeat this process with other buyers, thus increasing his business turnover.

Buyer:  With SCF, the buyer benefits from a reduction in the cost of goods purchased. This is because the lender not only relieves him of the pressure to pay for the invoice within 30 days but grants him an additional 30 days to do so. The buyer receives 60 days (or two months) to pay the same amount. With payment no longer an issue, suppliers have no reason to deny regular supplies to the buyer.

Lender:  The lender, who could be a bank or some non-bank financial institution, benefits in two ways. First, it can use the funds it already has lying around to generate interest income on them. Second, by collaborating with buyers and sellers, it is more likely to gain new customers for its supply chain.

ELIGIBILITY CRITERIA, DOCUMENTS NEEDED, INTEREST RATES, FEE & HOW TO APPLY 

 To be eligible for Supply Chain Finance, you must meet the following criteria:

1.  The applicant must be between 24 and 70 years of age at the time of maturity of the loan. 

2. The business must have been operating for at least three years. 

3. The buyer must have a good credit rating and no history of defaulting on payments.

Once you have decided to avail of supply chain finance; you would require the following documents:

1. Identity Proof/Address proof for the owner as well as business

2. Recent Bank statements

3. Recent VAT /GST documents

4. Invoices for the last 3 months

5. Sales ledger details for vendor

 The interest rate on SCF is calculated based on the daily utilization of the credit limit. To apply for SCF, visit the website and enter your contact details. A company representative will call you, meet you, and explain how to go about applying for SCF.

Conclusion

Mynd Fintech is a pioneering digital supply chain financing provider for Indian businesses. We offer several financing options—including vendor financing, dealer financing, invoice discounting, and factoring—to help businesses streamline their fund flow positions. To learn more about how we can help your business grow, please visit our website and fill out the form on the Contact Us page. One of our representatives will get back to you shortly to answer any questions you may have.