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Published : October 5, 2023, Updated : October 5, 2023

Supply Chain Finance Hacks To Transform Your Sourcing

Supply Chain Finance Hacks To Transform Your Sourcing

During the financial year 2021, around 73% of the Indian small and medium enterprises failed to make profits, as per a report shared by the Consortium of Indian Associations (CIA). Only 13% were able to balance their balance sheet, around 42% managed to keep their staff, and 59% had to cut their staff short.

Entered the Covid pandemic and the majority of the MSMEs struggled for funds, which led to poor credit scores. The growing trade finance gap is a worry for MSMEs as well. It was USD 1.5 trillion in 2019 and is expected to be USD 2.5 trillion by 2025. The business and the economy could be negatively impacted if this issue continues.

To get back to the growth trajectory, SMEs were looking for a financial solution, and supply chain finance came as a rescue. It allowed quick funds access at a low cost.

According to Gartner, 23% of the organizations questioned used supply chain finance in 2020 to manage their cash flow and the unpredictability of the economy.

This article talks about some supply chain hacks to transform your sourcing and lead you towards growth.

Also Read: What Can CFOs Do to De-Risk Supply Chain Finance in 2021

What is Supply Chain Finance?

Supply chain finance is a financial solution where a supplier can get cash against an unpaid invoice at a discounted rate. This solution is beneficial for the supplier and buyer in managing their working capital effectively.

Parties Involved In a Supply Chain Financing Arrangement?

Mainly, there are three parties involved in a SCF agreement:

The buyer
The supplier
Institution that provides supply chain finance.

Credlix is one of a reputed and reliable institution that provides such facilities to its customers on easy terms and good rates.

Also Read: What Are Credlix Solutions for Supplier Supply Chain Finance Challenges?

How Does Supply Chain Finance Work?

As per the arrangement made between the buyer and the supplier, the supplier sends an invoice to the buyer.
The buyer agrees to the invoice and is reliable to make the payment until the maturity of the invoice.
Meanwhile, the supplier is in need of funds and approaches a financial company to trade its unpaid invoices.
The bank gives the supplier the money they need, usually a portion of the invoice amount, before the buyer pays.
When the buyer settles the invoice, they pay the full amount to the bank. The bank earns interest, and the seller gets the funds upfront in times of need.

For SMEs, having enough cash to run their business operations smoothly is very important. But it’s complex to get money from traditional banks as loans because that would add to their financial burden. Therefore, the majority of these businesses opt for supply chain finance.

With supply chain finance, the buyers help the suppliers. How? Buyers make sure that everything is good from their end like paying the supplier on time, so suppliers can lend money. It’s more like a teamwork of the buyer and seller that makes supply chain finance a success.

Supply Chain Finance Benefits over Traditional Loans

In 2020, around the world, the amount of money involved in supply chain finance (SCF) was about $1,311 billion. This was a big increase of 35% compared to the previous year, 2019. So, SCF is becoming more popular and important for businesses.

Up to 4.6 trillion world exports could shift by 2025, according to a McKinsey analysis. While certain markets may suffer a shift of up to 26%, others may see a 60% shift in the upcoming years.

This shift means a need in the shift in the financing solutions to enable effortless financing execution, like supply chain finance.

Here’s how the supply chain financing is beneficial for your business:

Better Cash Flow: SCF allows easy access to funds when needed against unpaid invoices. It means better cash flow management for the business.

Better Buyer-Supplier Relationships: With flexibility in payment terms comes an improved relationship between the buyer and the seller that opens the door for long-term advantages in future deals.

Better Supply Chain Health: When suppliers are paid on time and buyers get the liberty to pay afterwards through supply chain finance, they can operate smoothly, ensuring a steady flow of goods and reducing disruptions in the supply chain.

Also Read: An Economic Winter for MSMEs? Is Your Supply Chain Finance Prepared?

Different Types of Supply Chain Financing Techniques

Below are the types of supply chain financing you can choose from that fit your needs the best:

Reverse Factoring: Reverse factoring is the SCF technique where the supplier approaches a financial institution for funds by trading its unpaid invoices, leading to improved cash flow.

Dynamic Receivable Discounting: Buyers extend the option of early payment discounts to their suppliers. This approach helps optimize the cash flow of both parties while ensuring that the buyer retains control over when they make payments.

Forfaiting: Forfaiting means a financial institution agrees to buy a supplier’s receivables at a discount. This shifts the risk and responsibility of collecting payments from the buyer to the financial institution.

Payable Financing: In payable financing, the buyer gets the liberty to extend the payment term, allowing the supplier to get early payment from a third party at a discounted rate.

Loans or Advances Against Receivables: Businesses can get short-term loans using their unpaid invoices as collateral.

Pre-shipment Finance: Before exporting goods, suppliers receive finance, which enables them to complete orders and control production costs. Normally, the loan is returned with the money made from selling the shipping products.

10 Supply Chain Finance Hacks to Transform Your Sourcing

These hacks below will help you make a more profitable agreement:

Work with your suppliers to make them agree to favorable SCF terms that are also beneficial for your cash flow and requirements.
Save on costs by taking advantage of early payment discounts offered by your supplier.
Explore financing options like dynamic discounting or reverse factoring to optimize cash flow.
Never rely on one supplier for your needs. Have your options ready to get the most favored deal in terms of cost and everything else.
Implement efficient procurement processes to minimize delays and reduce costs.
Always have a risk mitigation planning in place to get away with potential supply chain disruptions.
Use technology as much as possible to optimize inventory levels.

Final Words

Supply chain finance, in recent years, has become a lifeline for SMEs, especially during the financial crisis, both internally and externally. It improves the cash flow, boosts supplier-receiver relationships, and much more. With a growing trade finance gap, SCF has become very important.

By understanding its basics, and implementing those hacks, businesses can deal with uncertainties, increase profitability, and ensure a good future in the world of sourcing and supply chain management.

Also Read: Is Invoice Discounting the Right Supply Chain Finance Option for You?

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