A Look at Supply Chain Financing in The Future

Since the coronavirus outbreak last year, businesses in many sectors have had to adapt to a market climate that is constantly changing. The COVID-19 economic issues have severely impacted the supply networks of several businesses. But during this incredibly volatile moment, supply chain finance has offered a crucial lifeline.

The Covid Crisis demonstrated how businesses must use technology to their advantage and modernise their Supply Chain processes across all accessible channels, including brick and mortar and e-commerce. According to a survey by Arthur D. Little & CII, India's supply chain expenses represent 14% (compared to a global average of 8%), resulting in a $180 billion competitive disadvantage.

SCF is assisting companies in overcoming issues in their supply chains, which are mostly brought on by the coronavirus pandemic, in addition to boosting working capital and supplier relationships. Additionally, it helps enterprises grow into new areas and cultivate new commercial ties, which is benefiting the global economy in these trying times.

Institutions grant credit to businesses depending on their prior performance when it comes to funding commerce. Many MSMEs recover more than half of their receivables after more than 90 days, according to the ET Magazine Survey. Every year, 17% of MSMEs write off a quarter of their debt. This demonstrates the necessity of establishing an inclusive funding environment for all businesses.

Huge market potential

Banks and other large financial institutions do a lot of business in supply chain finance, but the method they provide this service is evolving quickly. They are steadily losing market share to fintech companies and other lenders who have more advanced SCF models.

For instance, challenger banks, P2P lending platforms, and dynamic discounting services are creating technological solutions to increase the effectiveness of payables, receivables, and other sorts of cash transactions. Additionally, as long as customers and investors support these advances, the supply chain finance market will experience tremendous growth over the next few years.

Additionally, businesses are looking more and more for financial solutions to aid in the recovery of their supply chains from the negative consequences of the coronavirus epidemic.

Traditional banks and financial institutions, many of which still largely rely on legacy systems, are being compelled to digitally adapt and modernise their supply chain finance capabilities as a result of this shifting market. Even if it takes a lot of time and money, it's a rare chance for banks to profit from the growth of a promising new sector.

In the end, both firms and suppliers gain from the emergence of new technologies in the supply chain finance sector. However, they also accomplish the objectives of the commercial department, procurement sector, and exchequer. Moreover, by digitising current supply chain finance solutions, banks will likely take more market share away from fintech firms.

Difficulties to be overcome

Although technology-driven supply chain financing offers significant advantages to consumers, vendors, and the whole financial services sector, it is not without difficulties. First off, supply chain finance is frequently viewed as a dangerous industry by credit reporting companies. And because of the pandemic's economic worries, this view has only gotten worse.

It was referred to as a "sleeping risk" in a prior study by S&P Global Ratings. Poor disclosures, according to the report, can have an adverse impact on a firm's overall health as well as lead to incorrect capital pricing or allocation.

High-profile occurrences like the failure of Greensill Capital serve to highlight the risks involved with supply chain finance. In the case of Greensill, it appears that borrowers were given funding based on hypothetical future bills and from customers who did not yet exist. Investors' trust in SCF could be harmed by this circumstance, which could also lead to more regulatory inspections.

The significance of maintaining proper management over one's investments has been demonstrated by this situation, nevertheless. Standards and guidelines established by the banking industry could contribute to better knowledge of SCF as a product while guarding against harmful abuses. In addition, banks must keep developing stronger frameworks for risk controls to stop bad behaviours from occurring again in the future.

New innovations

Regardless of the advantages and disadvantages of SCF technology, it is undeniable that the market is rapidly changing as businesses strive for more flexible and logical methods of supply chain finance. This has led to the development of numerous SCF breakthroughs.

As an illustration, SCF solution that unites banks, clients, vendors, and other potential funders on a single platform. It offers suppliers an invoice financing option through their own SAP Ariba screens and is based on the SAP Ariba Network. The platform seeks to improve working capital management and risk awareness while completely digitising and streamlining supply chain activities.