Why Businessmen Need to Know about Supply Chain Financing?

Why Businessmen Need to Know about Supply Chain Financing? SCF or supply chain finance plays an essential role in helping businesses meet the financial gap between the distribution of completed products or services and revenue generated back from them.

Enterprises usually avail this finance to offset any impacts brought by delay in payments. With MSMEs driving the Indian economy’s growth, the financing has a significant contribution in maintaining a smooth flow of operations to these enterprises.

As Micro, Small and Medium Enterprises in India shifts towards growth; a remarkable potential remains un-utilized.

Here’s a look

• • 45% – Total industrial output of MSMEs in the Indian economy as of July 2019.
  • 1.3 million – Number of jobs generated by MSMEs for every year.

While the growth prospects remain high, utilization of this sector faces challenges through factors like technology integration, international competition, infrastructural constraint, etc.

SCF thus seeks to minimize these hurdles via necessary funding for businesses to introduce technological, managerial as well as other simplifications.

Businesspersons need to have a proper understanding of financing for the supply chain process to streamline and optimize its management.

What is supply chain financing?

Supply chain financing comprises technology-based funding solutions that provide a short-term advance for an efficient transaction between a company and its associated chain of supply.

The financing tools involved ensuring sufficient availability of working capital for a smooth flow of goods or services from a manufacturer/producer to the end-user.

For example, a business requires stocking up inventory for an anticipated high demand but faces a funding shortage. It can thus meet this gap by availing one of the supply chain financing tools like invoice factoring.

Similarly, these financing solutions provide necessary funds for all parties in the chain to ensure efficient and timely completion of a transaction from the producer to the consumer.

Importance of supply chain finance

I. Bridging the gap between current assets and current liabilities

Sufficient availability of finance for supply chain management allows companies to effectively fill up the gap between current assets and liabilities as they move towards growth.

• 16% – Rate at which the current assets and liabilities gap are increasing since 2015 for MSMEs operating in the service sector.

The gap for manufacturing companies is increasing at a rate of 13%. With this widening gap, the requirement of working capital increases too. It, in turn, creates hurdles in the smooth functioning of the business supply chain across both these sectors.

II. Supports innovation and growth

Suppliers operating in this chain need to meet the increasing demand for goods and services from purchasing companies.

To effectively meet this demand in time as well as provide innovative solutions that offer competitive edge requires them to have an improved flow of working capital.

Finances available as SCF thus help them meet the funding requirements to implement these changes, and in turn, improve the supply chain process.

III. Mitigates the risk of delayed payments

Companies often come across circumstances where they have to miss the invoice due date of payments from debtors.

A stretched period can, however, result in them losing out on available opportunities due to lack of funds.

Immediate availability of supply chain finance thus makes up for this gap and allows them to take advantage of available opportunities. The risks associated with delayed payments are thus successfully mitigated.

Advances like business loans can also help meet this gap and come with flexible repayment options for the convenience of borrowers.

IV. Provides sufficient liquidity to incorporate changes as per seasonal demands

Liquidity constraint results in a business’s inability to make necessary changes to the supply chain to take advantage of seasonal demands.

For instance, a trading business dealing with textiles needs to adapt to supplying woollen clothes during winter.

In the absence of proper working capital management for the trading business and sufficient liquidity, it may not be able to maintain the necessary inventory for woolen clothes to meet the rising demands. In such instances, supply chain finance can come to the rescue big time.

V. Lower cost of financing

Today, increasing competition among financial institutions to provide the necessary finance for a smooth flow in the supply chain has brought advantages for borrowers. Companies thus need to incur a lower cost to avail the loan and its repayment.

Like, NBFCs offer supply chain finance in the form of business loans at competitive rates of interest along with several other advantages.

Plus, they also bring pre-approved offers that make the process of financing hassle-free while saving valuable time.

These offers are available on business loans, personal loans, and home loans as well as on several other financial products.

When availing supply chain finance, make sure to have a proper funding plan, including the amount required and fund allocation for timely repayment. Also, meet all eligibility requirements and keep all necessary documents handy.