Finance is the most important component for setting up a successful business. Business owners expect more output with less input in terms of financing costs. What lowers this financing cost for establishing a business?
Here comes the role of supply chain finance. Supply chain finance can be defined as the set of technology-based solutions that helps business owners to minimise the cost of financing and maximise business efficiency, taking consideration of both buyers and sellers who are part of a sales transaction. The supply chain finance work on the following methodology:
- Automating transactions
- Tracking invoice approval and settlement processes
These two processes take place from the initiation of the supply chain finance to the completion of it. In this process of supply chain financing, your client or customer approves your (suppliers’) invoices for financing by a bank or other outside financier.
Supply chain finance is beneficial for both, suppliers as well as buyers. The supplier gets easy access to the money or credit, and the buyers get enough time frame to settle down their balances.
The cash obtained from the supply chain finances can further be used for the seamless operation of the businesses.
Supply chain finance, also known as supplier finance or reverse factoring. It helps in optimising cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their small and medium enterprises suppliers to get paid early.
Supply Chain Financing is a set of services available for all the Medium-Sized and Big Corporates. Examples of supply chain finance include, Loans, Purchasing Order Finance, Factoring and Invoice Discounting are the most common.
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WORKING OF SUPPLY CHAIN FINANCE
If the buyer has a better credit rating when compared to the seller and can source capital from financial institutions such as banks or other financial providers at a minimal cost, then supply chain finance works best.
BENEFITS OF SUPPLY CHAIN FINANCE
Benefits For Buyers:
- Improve the supply chain’s condition. When the buyer offers supply chain financing to the supplier, the buyer can mitigate the probability of future supply chain hurdles which could have impacted his own business operations.
- Supply Chain Finance: Improve relationships with Suppliers. Buyers may foster their relationships with suppliers and gains an edge in negotiations by granting them access to reasonable financing.
- Supply Chain Finance Increases Working Capital. Buyers benefit from supply chain finance by improving their working capital position as many businesses choose to implement supply chain finance programmes concurrently with an effort to standardize supplier payment terms and conditions.
Benefits for Suppliers:
- Increased Working Capital. Employing supply chain finance helps suppliers to get paid for their bills sooner than expected. In turn, their days sales outstanding (DSO) get reduced, hence improving working capital.
- Availing credit at a lower price. Due to the lower cost of borrowing for suppliers using supply chain financing than it is if they utilize other sources, such as factoring, it is one of the preferred methods of getting the capital.
- Increases the Precision of Cash Estimates. Those suppliers who use supply chain financing, the timing of incoming payments often become regular, thereby making it easier for them to precisely estimate their future cash flows.
COST OF SUPPLY CHAIN FINANCE
One of the major benefits of supply chain finance is that the buyer need not have to pay any fee for extending its payment terms. The supplier has to pay a small discount if they want to get paid early.
WHY GO FOR SUPPLY CHAIN FINANCE?
Supply Chain Finance is known for the reason that it makes sales activities seamless. It protects business transactions and promotes global import & export activities. In turn, it is a win-win-win situation (3 parties, 3 winners).
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Since Supply chain finance (SCF) is an essential component of Supply Chain Management, it is crucial to consider becoming part of it for business transactions and operations.
Supply Chain Finance also helps in connecting buyers & sellers with financing institutions. To conclude we can say that, it helps businesses to lower financing costs and improve their efficiency.
Important to note here, that it unlocks working capital tied in the supply chain. Supply Chain Finance is a component of Trade Finance too.
About which we will be discussing in our next blog posts.