Why is Supply Chain Financing Important among SMEs and How to Leverage it?

Md. Meher Ullah • October 14, 2022 • 9 mins read

All businesses need financing, either as an investment or a source of working capital. Working capital is used to finance inventory, buy raw materials for production, and bridge the gap until receivables from consumers are paid. Because of this, initiatives worldwide to close the funding gap for small and micro-sized enterprises must prioritize access to appropriate financing solutions.

  1. What is Supply Chain Financing
  2. Supply Chain Financing Examples
  3. Understanding the Benefits of Supply Chain Financing
  4. How You Can Leverage SCF
  5. iLending’s personal loans

What is Supply Chain Financing

Supply Chain Financing (SCF) links buyers and sellers in a transaction that can reduce financing costs and boost operational effectiveness.

By taking part in this arrangement, buyers consent to the financing of their suppliers' invoices by a bank or other third party financier, frequently referred to as "factors." In order to maximize working capital and offer liquidity, these financiers extend short-term credit to both suppliers and customers.

With Supply Chain Finance's special structure, which exploits the power of the buyer's firm as security for the loan, invoices raised by suppliers to larger clients can be paid more promptly, creating a win-win situation for all parties involved.

Suppliers receive quicker access to their own funds while buyers are given more time to pay their balances. The available funds can be used by both parties to fund new initiatives and maintain the efficiency of their respective businesses.

Millions of SMEs with restricted options and a lack of fixed collateral could benefit from this by having better prospects. Although supply chain financing solutions are widely used throughout the world, many emerging economies are unable to offer them due to a lack of financial infrastructure, technological capacity, resources, and knowledge.

Supply Chain Financing Examples

Let's say that Company A buys products from Supplier B. Typically, Supplier B transfers the products and sends an invoice to Company A, who then approves payment on a customary 30-day credit period.

But if Supplier B needs cash right away, it can use the Supply Chain Finance arrangement to ask Company A's connected financial institution for payment, at a discount.

Instead of the previous credit cycle of 30 days, financial institutions pay Supplier B and extend Company A's credit term by an additional 30 days, for a total credit period of 60 days.

Understanding the Benefits of Supply Chain Financing

The solutions that buyers and sellers have been seeking are all offered by supply chain financing, which also presents a chance for the development and growth of each party's business.

The method of supply chain financing has a number of benefits:

1. Buyers can extend payment terms. Buyers have far greater freedom in how they run their operations because they have the option to extend the payment terms if necessary. The supplier is getting timely payments, which enables them to plan for any potential business risks and maintain their cash flow.

2. Supplier controls cash flow. Suppliers' chances of receiving payment have greatly increased thanks to supply chain finance. Since the supplier is getting paid more promptly than usual, they can invest in the company and continue to be profitable.

3. Suppliers get lower interest rates. In a transaction carried out using the supply chain financing approach, the financing is accomplished through the buyer. The supplier may be able to obtain a substantially cheaper loan rate than they otherwise would if the buyer has a larger company (and consequently better credit rating).

4. Encouraging strong collaboration between buyer and supplier. Each participant in supply chain finance is dedicated to enhancing the connection and the success of the other. The buyer wants to do everything in their power to assist their suppliers so that they do not go out of business in order to prevent losing them. However, when the economy unexpectedly changes, businesses might need to adjust the way they handle their finances.

5. Additional working capital for your business. In addition to the conventional financing alternatives, supply chain finance facilities give the company more working capital. Business owners win from this kind of financing by giving customers longer payment terms, making more purchases at a discount, and getting access to credit.

How You Can Leverage SCF

By increasing payment process transparency, supply chain finance enables buyers and sellers to better protect themselves against unforeseen financial risks. Both businesses may make the most use of their resources and close the credit gap by investing in technology and analytics.

After due diligence, supply chain finance facilities can be issued in a matter of business days, enabling your company to move rapidly between opportunities.

* In the course of reviewing applications, the financial business decides:
* the creditworthiness of the company,
* the cash conversion cycle,
* net margins,
* and net worth.

The facility amount and the maximum number of days to pay the invoices are made available to suppliers in this way.

October 17, 2022 • 9 mins read
October 17, 2022 • 9 mins read