How deep-tier supply chain financing is enabling sustainable development and global linkages
Deep-tier financing offers a huge untapped opportunity to the MSME segment by removing structural barriers and creating a healthy ecosystem that supports their growth.
Supply Chain Financing (SCF) enables businesses to optimise their cash flow by providing access to funding based on the creditworthiness of their buyers or the performance of their supply chain. However, at the moment, SCF provides payment solutions only to the anchor corporations and their suppliers up to one or two tiers. (Tier I suppliers are typically direct suppliers of the final product, while Tier II suppliers are subcontractors for Tier I suppliers).
Financial institutions provide short-term loans through the invoice discounting mechanism to enhance working capital and offer liquidity to both parties. This allows more time for buyers to pay their outstanding dues while at the same time quickly releasing funds owed by the suppliers. The cash on hand may be utilised for future endeavour to ensure the stability of both enterprises.
According to a report, the global supply chain finance market was valued at $6 billion in 2021, and is anticipated to touch $13.4 billion by 2031, growing at a CAGR of 8.8% from 2022 to 2031.
Deep-tier financing - A Game Changer
Deep-tier Supply Chain Financing (DTSCF) can be a game-changer for Micro, Small, and Medium Enterprises (MSMEs) value chains by providing them access to financing solutions linked to the performance of the entire supply chain. This model aims to establish a healthy and mutually-beneficial ecosystem for Tier II and Tier III suppliers (Tier III suppliers are subcontractors to Tier II suppliers).
MSMEs have limited access to traditional forms of financing such as lines of credit or bank loans. Therefore, deep-tier supply chain financing helps them to receive funding at competitive interest rates and with more flexible terms.
Deep Tier SCF – Aiding Sustainable Development
Businesses can significantly impact the climate by reducing the negative aspects and enhancing the positives by decarbonising and executing measures to achieve net-zero supply chains. This will contribute to reducing emissions globally from all sectors and speed up climate change initiatives in regions where this subject still needs to be prioritised. A significant challenge to overcome this is efficiently detecting and monitoring supply chain emissions.
Global supply chains account for up to 80% of the world's carbon emissions, and scope 3 emissions account for 75%–95% for finished goods value chains such as food, automotive, construction, and electronics industries. As per the Boston Consulting Group (BCG), eight supply chains account for more than 50% of world emissions, with only a few corporations directly controlling a sizable portion.
SCF platforms are uniquely positioned to play a significant role here due to their evolution to collect and analyse data beyond financial metrics. This is particularly pertinent to Deep-tier Supply Chain Finance (DTSCF) projects that target deeper echelons of the supply chain. Buyers can include incentive mechanisms in their DTSCF program in addition to the practical benefit of contacting more suppliers to gather data and create a comprehensive picture of the supply chain.
For example, suppliers with high ESG ratings and those meeting abatement targets can access financing at a preferential rate. In return, this enables the anchor buyer to actively work towards fulfilling emission targets.
The deep-tier financing model also supports sustainable development. It helps small and mid-sized suppliers plan their investments into energy-efficient and digital resources, improve liquidity for businesses, and enhance their linkages to the global supply chain ecosystem.
Small enterprises can become the driving force of sustainable development--the primary approach for the entire nation. Government initiatives aim to encourage sustainable practices for small enterprises and progress in fintech solutions.
In India, the government has taken several initiatives to promote supply chain finance as a tool for supporting MSME growth. For example, the Reserve Bank of India has introduced guidelines for the operation of Trade Receivables Discounting System (TReDS) platforms, which provide a digital marketplace for invoice discounting.
Importance of Working Capital Management
For MSMEs, working capital is crucial to keep their operating cycles afloat. As per a recent study, small businesses require over 70% of the funds in the form of working capital, and SCF has largely benefitted small business owners.
In order to automate transactions and make tracking payments and invoices a hassle-free experience, technology-enabled SCF providers have come a long way.
The MSME sector is getting a boost as deep-tier financing is helping it remove many structural hurdles that affect its growth by tapping unexplored opportunities. Due to deep-tier SCF, lenders can expand their anchor client propositions by offering attractive supply chain financing options across multiple suppliers.
The deep-tier supply chain aims to support those even at the bottom of the supply chain pyramid and serve the under served.
Deep-tier supply chain financing has emerged as a critical tool for businesses to manage their supply chains and improve their financial performance. It provides a win-win situation for both suppliers and buyers by ensuring a stable cash flow and reducing the risk of disruptions in the domestic and global supply chains.
Edited by Megha Reddy
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)