Why Innovative Supply chain financing is a win-win situation

    30th Nov 2018
    • +0
    Share on
    close
    • +0
    Share on
    close
    Share on
    close

    Today, supply chains are interwoven and payment terms are more often than not time bound, causing a severe shortage of capital for both buyers and sellers. Since working capital is tied up in the supply chain until invoices are processed, buyers want better payment terms from suppliers and suppliers want better payment terms from buyers. This tug of war between these competing objectives causes the chain to slow down and has a cascading effect on different aspects of trade and retail.

    Supply chains must overcome challenges to ensure that quality products and services reach their end consumers on time and financing the improvement of this linkage is essential for the growth of businesses and the economy. This is where Supply Chain Financing (SCF) comes in to the picture by enabling companies to unlock the resources trapped in their complex supply chain system and facilitating access to finance. This creates a win – win situation for both suppliers and buyers by optimizing working capital.

    An Overview of Supply Chain Finance

    There are two broad types of supply chain finance models in the market which can be described as “corporate or buyer initiated” and “supplier or vendor initiated”.

    The buyers are always looking for the very best payment terms from suppliers, which means requesting for credit extensions and paying their invoices at a much later date. In 2017, India with an average of 63 days had one of the longest invoice to cash turnaround periods of the Asia Pacific countries surveyed. The longer a buyer can extend supplier invoices past the due dates, the more working capital they will have available. Hence, by extending payment and credit terms, the buyers utilize their working capital in other ways that benefit their business. However, suppliers need access to more frequent capital, take care of expenses such as raw material, labour, rent, etc. With an average delay of more that 35 days, 41.2% of suppliers in India said that due to these payment delays they needed to take additional measures to correct cash flows. Financing this gap can become very expensive and time – consuming. Setting up credit facilities with traditional financing institutions can take a long time and in most cases require security and collateral which is generally limited for the majority of the vendor base. Also the supplier’s creditworthiness/years in business etc. has a significant role to play in their ability to raise working capital. This generally limits the amount of capital that can be raised.

    Supply Chain Financing options become attractive for vendors by offering a form of working capital finance that provides liquidity that is primarily used to fund vendor receivables. The financing company will pay the supplier the full amount of any outstanding invoice before due date, once it is approved by the buyer and as long as the vendors are willing to provide a cash discount or accept a discounting rate in line with their creditworthiness.

    For vendors, the cash discount or discounting cost means a slight reduction in gross margins and in return they have the benefit of raising the capital without the need for any security, collateral or delay. Moreover, in most cases there is no recourse on the vendor. In other words, if the buyer fails to pay the vendor is not held liable to repay the loan. The fund provider relies on the strength of the corporate’s business and creditworthiness and can pay the supplier invoices with utmost confidence. The Buyer benefits since it provides them with instant cost savings while keeping the original payment terms.

    Advantages of Supply Chain Finance

    On average, 96.7% of respondents in India reported late payments from their domestic B2B customers. This is the highest percentage of respondents reporting late domestic payments in Asia Pacific. It is easy to see how this practice leads to friction between the buyer and seller which often results in supply chain players, especially the small and medium ones deciding that they have no option but to leave the supply chain. This departure can cause great disturbance in the supply chain leading to delays and at times when one party fails to pay or the payment is delayed, a domino effect takes place down the line. Instead, Buyers offering vendors innovative supply chain finance solutions, can continue to operate without disruption. An efficient supply chain in turn improves the ease of doing business, reduces manufacturing costs and also helps to accelerate growth rates due to better market access.

    Working capital is the lifeline of every business. Freeing up cash flow and working capital reduces pressure on vendors, while simultaneously eliminating the need to borrow at unaffordable interest rates which in turn is good use of liquidity from the point of view of the supply chain. In the uncertain interest rate environment today, all businesses are constantly looking out for new ways of funding, investing and risk prevention, hence supply chain finance can provide them with a viable source of liquidity. Suppliers also happen to be far more vulnerable to economic shocks than other players within the supply chain, receiving early payment on invoices can help absorb such shocks.

    Supply chain finance also helps companies and vendors build stronger working relationships with each other. They can work together with confidence on long-term projects since an important buyer or supplier will be around for the long haul. These types of relationships create stability throughout the entire supply chain and where shortage exists, buyers can use supply chain finance to attract the very best suppliers without impacting their own working capital.

    A major USP of Supply Chain Finance is that when executed properly, it is beneficial for all the parties, since both buyers and suppliers depend on each other to keep the supply chain moving. While Supply chain finance has been around for years; technology and financial innovation has made it more effective, more efficient and easier, which means that the benefits are now available faster and to a much wider range of companies than ever before. Buyers are enjoying significant cost benefits and extension of their Days Payable Outstanding while Vendors are able to have access to instant credit at affordable rates and shrinking their receivables outstanding days.

    (Source: https://atradiuscollections.com/global/reports/payment-practices-barometer-india-2017.html)



    ############

    The author is the Co-founder and CEO of CredAble, a FinTech company that is transforming supply chain finance with its proprietary Working Capital Optimization platform and ‘just-in-time’ working capital financing solutions with a mission to triple the available working capital in India over the next 5 years.

    CredAble partners with leading blue-chip corporates to provide innovative digital supply chain financing and working capital optimization solutions that enable their vendors, dealers and distributors instant access to working capital and drives significant economic benefits to the entire supply chain in the process. 

    He is available to answer any question @ nirav@credable.in


    • +0
    Share on
    close
    • +0
    Share on
    close
    Share on
    close
    This is a YourStory community post, written by one of our readers.The images and content in this post belong to their respective owners. If you feel that any content posted here is a violation of your copyright, please write to us at mystory@yourstory.com and we will take it down. There has been no commercial exchange by YourStory for the publication of this article.
    Report an issue
    Authors

    Related Tags