Supply Chain Finance (SCF) is a short-term working capital finance that can be availed by dealers or suppliers having good business relationships with enterprises to optimize working capital requirements. It is a process in which an enterprise gets its supplier’s payments financed by an external financier. Supply Chain Finance is a mix of financial instruments like bill discounting and overdraft that focuses to optimize finance and flexibility for the customer.
SCF is also defined as a set of business and financing practices that form the connections between various parties in a transaction – buyer, seller and financing institution – in order to lower financing costs and improve business efficiency.
The Procedure followed in India
- Supply Chain Finance is a financial agreement between buyer and supplier (financer)
- Invoice of shipped or supplied goods or provided services is raised by the supplier for the buyer
- Supplier sends the invoice to financer’s supply chain finance platform
- Buyer approve the invoices on the same platform
- Financer pays the supplier against the received invoice
- Financer debit the amount from buyer’s account at the time of invoice maturity
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Example of Supply Chain Finance
Let’s assume that ‘A’ buys goods from supplier ‘Z’. Y supplies the goods and sends the invoice to ‘A’. Then ‘A’ approves the payment on terms of 30, 60 or 90 days. If ‘Z’ requires payment before the defined time duration, then ‘Z’ or supplier may request immediate payment for the approved invoice from A’s financial firm. The immediate cash required by supplier has to be on discount. Further, A’s financial firm will remit the invoiced amount to ‘Z’ the supplier.
Comparison of Business Loan Interest Rates offered by Top Banks/NBFCs – 2023
|Axis Bank||14.95% - 19.20% p.a.||Apply Now|
|Bajaj Finserv||9.75% - 30% p.a.||Apply Now|
|Flexiloans||1% per month onwards||Apply Now|
|HDB Financial Services Ltd.||Up to 36% p.a.||Apply Now|
|HDFC Bank||10% - 22.50% p.a.||Apply Now|
|IDFC First Bank||10.50% p.a. onwards||Apply Now|
|Indifi||1.50% per month onwards||Apply Now|
|Kotak Mahindra Bank||16% - 26% p.a.||Apply Now|
|Lendingkart||12% - 27% p.a.||Apply Now|
|Mcapital||2% per month onwards||Apply Now|
|NeoGrowth Finance||19% - 24% p.a.||Apply Now|
|Tata Capital||12% p.a. onwards||Apply Now|
|UGRO Capital||9% - 36% p.a.||Apply Now|
Benefits of Supply Chain Finance
|Increases cash flow||Minimizes investment in working capital||Offers working capital for the purchase of inventory|
|Provides post-shipment financing||Reduces Cost of Goods Sold (COGS)||Lower cost of funds than other working capital products|
|Early payment reduces financial dependence on the buyer||Automation reduces administration cost||Improves financial discipline due to short duration|
|Reduces the cost of capital by leveraging buyer’s credit rating||Reduces total cost of borrowing||Automation decreases administration cost|
Focus markets or sectors that largely prefer this financial instrument are agro, FMCG, commodities, electrical, electronics and consumer durables.
Types of trading services offered under Supply Chain Finance are as follows:
- Letter of Credit
- Export and Import bills for collections
- Export Letter of credit advising
- Import and Invoice financing
- LC checking, negotiation, confirmation and safekeeping
- Performance bonds
- Pre-shipment export finance
- Shipping guarantees
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Instruments of Supply Chain Finance
Reverse Factoring: This financial instrument permits sellers to sell their drafts relating to a specific buyer to a bank at a discount, instantly after they are approved by buyer
Inventory finance: It allows seller to hold goods in a warehouse for buyer till the time goods are not required.
Purchase order: This is basically an order that is available to the seller based on a purchase order received from a buyer.
Must Read: How to Apply For Small Business Loan
SBI Supply Chain Finance
SBI has added a financial feature to its range of products that is supply chain finance for the benefit and convenience of its customers. Supply chain finance will add strength in financing supply chain partners with the help of SBI. SBI has launched an online platform for providing funding support to supply chain partners of renowned and established corporate enterprises.
SBI provides financing services through its two products, such as Electronic Vendor Financing Scheme (e-VFS) and Electronic Dealer Financing Scheme (e-DFS).
This platform can be accessed via its online portal: https://scfu.onlinesbi.com/vfim/login.htm
Benefits of Online platform:
- Offers online and paperless banking
- Offers hassle-free paperless online banking service
- Customization as per business requirements is possible
- Platform is integrated with Corporate Enterprise Resource Planning Software (ERP)/SAP
Types of Supply Chain Finance Products offered by SBI:
Electronic Vendor Financing Scheme (e-VFS): The buyers can easily upload the details of invoices raised by their respective vendors on SBI’s online platform which results in instant credit to the vendor account.
Electronic Dealer Financing Scheme (e-DFS): Sellers make online requests to SBI’s online platform for debiting dealers’ accounts by providing details of invoices raised on their respective dealers that result in immediate credit to the corporate seller’s account.
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Q. Who all can avail Supply Chain Finance?
Ans. Entities including public and private limited companies, sole proprietorship, partnerships and limited liability companies having decent experience can avail supply chain finance.
Q. What is the repayment tenure of supply chain finance?
Ans. The repayment tenure of supply chain finance is 12 months (yearly renewable) or may exceed depending on business requirements.
Q. What are the types of SME loans for Supply Chain Finance?
Ans. SME loans for supply chain finance include factoring of receivables, dealer financing, vendor financing, and rent receivable financing.
Q. How is the interest rate calculated and finalized by the company providing supply chain finance?
Ans. The interest rate is calculated on the basis of the daily utilization of the credit limit.
Q. How many limits can a business avail from Supply Chain Finance?
Ans. The limit depends on the business requirements, strong financial history or stability, creditworthiness of business and business existence or establishment.