Why Is Supply Chain Financing in Demand Among SMBs and How to Leverage It?

SMBs may have found the perfect product-market fit but are restricted from capitalizing on the opportunity without access to timely funds. Small businesses can benefit from supply chain financing by getting access to instant financing and liquidity in this situation. Accounting standards cover the accounting by the supplier for advances it receives under this arrangement.

Financing is required by all businesses, either as an investment or a working capital source. Working capital is employed to purchase the input materials for production, finance inventory, and bridge the time until customers pay their due amount. That’s why access to suitable financing options is key in global efforts to reduce the finance gap for small and mid-size businesses (SMBs).

In this article, you will understand what Supply Chain Finance (SCF) is and why it is in demand by SMBs.

What Is Supply Chain Finance?

In Supply Chain Finance (SCF), buyers and sellers linked in a transaction can lower financing costs and improve business efficiency.

By participating in this arrangement, buyers approve their suppliers’ invoices so that they can be financed by a bank or other outside party, often referred to as “factors.” These financiers provide both buyers and suppliers with short-term credit to provide liquidity & optimize working capital.

Invoices raised by suppliers to larger customers can be paid more quickly through Supply Chain Finance’s unique structure that uses the strength of the buyer’s business as security for the lender, resulting in a win-win situation for everyone.

Buyers are given more time to repay their balances, while suppliers get faster access to their own funds. On both sides, the parties can use the cash on hand for other projects and keep their respective operations running smoothly.

This has the potential to improve the prospects for millions of SMBs who are held back by a lack of fixed collateral and limited offerings. A lack of financial infrastructure, technological capability, resources, and awareness prevents many emerging economies from offering Supply Chain Financing products despite their popularity in many parts of the world.

Example of Supply Chain Financing

Suppose Company A purchases goods from the seller, Supplier B. Under traditional circumstances, Supplier B transfers the goods and submits an invoice to Company A, which approves the payment on a standard credit term of 30 days.

But if Supplier B immediately needs cash, it may request payment, at a discount, from Company A’s affiliated financial institution using the Supply Chain Finance arrangement.

Financial institutions issue payment to Supplier B and extend Company A’s credit term by another 30 days, for a total credit term of 60 days, rather than the previous credit cycle of 30 days.

Benefits of Supply Chain Finance to SMBs

Supply chain financing provides all the answers that buyers and sellers have been looking for, and it provides an opportunity for the growth and expansion of their respective businesses.

There are many advantages of using the Supply Chain Financing method:

1. The Buyer Can Extend the Payment Terms

If buyers need to, they can make the payment terms longer, which gives them a lot more flexibility when running their businesses. Payments to the supplier are being made on time, allowing them to plan for any business risks that may arise so their cash flow is not interrupted.

2. The Supplier Controls the Cash Flow

Because of supply chain finance, suppliers have a lot more chances of getting paid. Due to the supplier receiving payment quicker than normal, they can invest in the business and remain viable since they are getting paid more quickly.

3. Suppliers Get Lower Interest Rates

The financing is done through the buyer in a transaction done via the supply chain financing model. If the buyer has a bigger business (consecutively a better credit rating), the supplier can get a much lower interest rate than they would get otherwise.

4. Encourage Strong Collaborations Between the Buyer & Supplier

In Supply Chain Finance, each party is committed to the success of the other and to strengthening the relationship. In order to avoid losing their suppliers, the buyer wants to do everything they can to help them so that they do not go out of business. However, companies may have to change how they manage their money when economic conditions suddenly shift.

5. Additional Working Capital for the Business

Supply Chain Finance facilities provide additional working capital for the business by complementing the traditional financing options. Business owners benefit from this type of financing by extending payment terms to clients, purchasing more products with favorable terms, and gaining access to credit.

How Can SMBs Leverage Supply Chain Finance?

Supply chain financing increases transparency in the payment processes, making it easier for the buyers and sellers to safeguard themselves against financial uncertainties. By investing in technology and analytics, both companies can maximise the use of their resources and fill in the credit gap.

Supply Chain Finance facilities can be approved within a few business days after due diligence, allowing your business to move quickly between opportunities.

As part of the application process, the finance company determines:

the creditworthiness of the company,
the cash conversion cycle,
net margins,
and net worth.

This helps suppliers gain access to the facility amount and the maximum number of days to repay the invoices.

How Finezza Can Aid Your Supply Chain Finance Journey

Keeping track of the finances can get difficult if you engage in large credit transactions with your customers. This can make it difficult to grow and run operations smoothly.

Supply chain finance offers a solution in the form of tech-based business and financing processes. This results in lower costs and improved efficiency in such a transaction. It works best when the buyer has a better credit rating than the seller and can thus access capital at a lower cost.

Finezza has developed a wide variety of products, including a Loan Management System that helps banks, NBFCs, and other lenders to

Track and manage credit applications
Facilitate proactive monitoring of loans
Create loan documents to save up time
Provides a complete collection management mechanism
Process KYC documents faster and streamline the entire Supply chain finance process