Supply chain financing (SCF) is a financing solution that brings buyers, sellers and lenders together. This arrangement helps clear and unlock the working capital locked in the supply chain. It helps businesses improve liquidity, build stronger supplier relations, and reduce supply chain risks.
Despite the many benefits this arrangement offers to all stakeholders, it has a flaw: a lack of transparency. This process involves multiple parties who cannot review what the other is doing at any point, This results in blind spots, affecting the efficiency of the process.
However, modern Blockchain technology offers a solution to this problem and gives all stakeholders full transparency besides other benefits.
Blockchain market size in supply chain finance was valued at USD 360.75 Million in 2021, estimated to be USD 13453.48 Million by 2030, growing at a CAGR of 49.75%. These numbers suggest the effectiveness of this technology in current times.
In this blog post, we will discuss blockchain’s positive impact on supply chain financing and how it enhances security and productivity.
Supply Chain Financing: An Outline
Supply chain finance is a financing solution which allows suppliers to receive early payment on their invoices. It is a short-term finance option that reduces the risk of disruption in the supply chain and helps buyers and suppliers optimise their working capital.
There are three stakeholders in the supply chain financing process, the supplier(seller), the buyer and the bank or the financial institution (FI) that lends the funds. Supply chain finance offers benefits to all participants.
The business owners (suppliers) sell their invoices to a financial institution at a discounted rate; the FI provides the supplier short-term credit to meet their working capital needs.
What is Blockchain?
Blockchain is a relatively new, distributed ledger technology that allows the recording of transactions in a secure, transparent, and tamper-proof manner. Using blockchain in SCF results in better efficiency and improved transparency and security.
Blockchain is an expanding chain of blocks; each block comprises several transactions. Whenever a new transaction occurs on the blockchain, a record of that is added to every participant’s ledger. Each block is linked using robust cryptography.
Using blockchain paves a system of recording information which is difficult or impossible to modify, hack, or cheat the system. Thus, it addresses a vital weakness in supply chain financing, the absence of transparency and visibility. Every participant in the chain can see backwards and forwards from beginning to end; all the information is visible.
How Can Blockchain Help Enhance Security and Efficiency in Supply Chain Financing for Lenders?
Blockchain, like automation and Artificial Intelligence (AI), offers many benefits to lenders. For example:
1. Enhanced Security
Blockchain transactions are tamper-proof as every transaction is encrypted with the private key (user’s digital signature). Each participant in the supply chain financing process has a unique digital signature. At the initiation stage of the transaction, the user’s digital signature is used to encrypt and secure it.
Using blockchain makes the process tamper-proof as there is a sequential audit trail, and counterfeiting a transaction is almost impossible. Lenders can keep their sensitive data safe from unauthorised access and prevent fraud with the help of blockchain.
2. Improved Speed and Responsiveness
The blockchain can supply businesses with a platform to streamline and automate supply chain finance processes. Digitising manual processes involved in supply chain financing makes them faste
Real-time and streamlined data transfer between all participants reduces the chances of lag in operations due to delays in information availability. Participants can respond more quickly to changes in business conditions. With blockchain, lenders can process the supply chain financing request faster.
For example, verification of invoice authenticity can be done instantly, allowing suppliers to access funds in real time. Streamlined operations assist in faster approval and disbursal of funds. This allows the borrower to access funds timely and reinforces their trust in the lender.
3. Detect Errors and Frauds
Supply chain financing involves multiple participants and transactions with the possibility of an error at every level. These errors could be mistakes in inventory data, missing shipments or payment-related issues.
Traditional methods make spotting errors in real-time challenging as they might involve scrutinising and analysing many documents. These oversights and mistakes may come to light later in routine audits.
Blockchain-based supply chain financing detects errors and identifies their root cause faster. This safeguards the lender from losing resources. It also provides lenders with real-time visibility into the supply chain contributing to a reduction in errors and frauds.
For example, the lender can track the movement of goods and confirm the authenticity of invoices after deploying blockchain.
4. Reduced Cost and Optimized Efficiency
Automation of manual operations with blockchain enables lenders to save costs. Lenders can process the supply chain financing request faster with blockchain.
Blockchain can automate processes like sending invoices or managing disputes, helping businesses save money and enhance efficiency. Streamlining the entire supply chain financing reduces manpower costs and the time taken in sanctioning and disbursing funds while eliminating scopes of errors.
5. Provides Transparency
All participants have access to the same data, which promotes transparency in the supply chain financing process. The blockchain also facilitates trust and continuity between parties in transactions with faster approvals and reduced scope of errors.
The single, shared view of the supply chain fosters collaboration and improves communication between lenders and suppliers.
The Takeaway
Blockchain technology can help lenders enhance security and efficiency in supply chain financing in a number of ways. Better security, reduced costs, enhanced speed and responsiveness, lower chances of errors and frauds and transparency, apart from benefiting lenders, create a more collaborative environment between lenders, suppliers, and buyers.
Combined with blockchain solutions like the comprehensive analytics suite allow lenders to interact with various stakeholders at different stages of the lending lifecycle and improve overall performance.
Finezza offers multiple fintech-enabled solutions to facilitate lending, enabling lenders to stay ahead in the competitive landscape.
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