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 optimise 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.
- Supply Chain Finance is a financial agreement between buyer and supplier (financer)
- Invoice of shipped or supplied goods or provided services is raised by 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
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.
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
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.
Who all can avail Supply Chain Finance?
Entities including public and private limited companies, sole proprietorships, partnerships and limited liability companies having decent experience can avail supply chain finance.
What is the repayment tenure of supply chain finance?
The repayment tenure of supply chain finance is 12 months (yearly renewable) or may exceed depending on business requirements.
What are the types SME loans for Supply Chain Finance?
SME loans for supply chain finance include factoring of receivables, and dealer financing, vendor financing and rent receivable financing.
How is the interest rate calculated and finalized by the company providing supply chain finance?
The interest rate is calculated on the basis of daily’s utilization of credit limit.
How much limit can a business avail from Supply Chain Finance?
The limit depends on the business requirements, strong financial history or stability, creditworthiness of business and business existence or establishment.