Future of Supply Chain Financing

Supply chain finance is a set of solutions that allows businesses to lengthen their payment terms while providing the option for SME suppliers to get paid early. It brings out a win-win situation for both buyers and suppliers. The buyer can optimize the working capital, whereas the supplier generates additional operating cash flow, minimizing the level of risk across the supply chain.

How Has Supply Chain Finance Changed Over the Years?

The supply chain was first seen as a single technique – an approach through which the large companies in a supply chain were using financial heft to help their trading partners secure bank finance at lower rates. But the existing supply chain has significantly evolved beyond the limited view.

Today, the increasing availability of liquidity among large companies has expanded their options to support their trading partners with finance. Also, the advancing technology has built a plethora of finance options.

One of the most significant shifts in supply chain financing solutions is the tendency of big companies to use their cash and fund the program. Yes, now, the firms with excess cash find themselves in a position to offer liquidity leverage directly to their suppliers.

Why is Supply Chain Finance Popular?

The buying organization uses a third-party funder to extend its payment terms with supply chain finance. It is a cloud-based platform through which buyers and sellers communicate about their finances and work with their financial institutions. Supply chain financing is getting popular among buyers and suppliers because of the following reasons:  

1. Buyers can extend payment terms: Extending payment terms requires careful consideration. With supply chain financing, buyers can make the payment terms longer, which gives them a lot more flexibility while running their businesses. They can purchase more products with favourable terms and gain access to credit.

2. Suppliers get a lower interest rate: The financing is done through the buyer in a transaction via the supply chain financing model. When the buyer has a better credit rating, the supplier gets a much lower interest rate than they would get otherwise.

3. Strengthens buyer-supplier relationship: In supply chain finance, each party is committed to the success of the other that finally helps strengthen the relationship. If a supplier goes out of business, the buyer loses the critical source of his stock. Similarly, if the buyer struggles, his inability to pay back ultimately harms the supplier. So, the financial flexibility that a supply chain finance agreement provides is that both the parties consider a mutual investment to guarantee their continued shared success

4. Lower funding cost for suppliers: Through supply chain financing, the financial cost of suppliers is lower as it doesn’t consider traditional ways to measure credit.

5. Helps buyers manage inventory better: Supply chain financing helps businesses optimize inventory and invest in better raw materials. It helps them avail innovative solutions to forecast demand patterns in the industries.

Supply Chain Financing for a Better World

Supply chain financing focuses on unlocking working capital for your organization through purchasing your accounts receivable. The financial institution buys your receivables. By arranging your supply chain financing, you collect the payment in full from your customer at a later date. Unlike a business loan, one doesn’t have to repay the funding from supply chain finance.

Today’s global supply chain helps your business keep moving without interruptions. One doesn’t need to undergo a lengthy application process and wait weeks for the finance. Therefore, supply chain financing is definitely a reliable option for businesses that are in continuous need of working capital.

A Look Toward Future of Supply Chain Finance

Supply chain finance is gaining a stronghold worldwide. It delivers more than 50% of the global trade revenue. Today, in the globalized economy, every organization is finding innovative ways to automate financial supply chains effectively:

• The digitization of supply chain financing: In today’s techno-savvy world, technology-based solutions are helping MSMEs lower their financing costs and help improve the business efficiency of buyers and sellers in a sales transaction.

• Builds a sizeable financial pool: With multiple players providing values and better working capital, suppliers can have access to more financing options.

A Huge Market Opportunity

Undoubtedly, supply chain financing is a blessing for fast-growing companies. It acts as a saviour and helps businesses with the increased demand without hiccups. Supply Chain Financing helps improve working capital and supplier relationships and helps businesses overcome supply chain challenges. In this way, businesses expand their presence in new markets.

How to Overcome Challenges in Supply Chain Financing?

Post Covid-19, supply chain financing has experienced many difficulties, whether it’s compliance issues, lack of accounting and legal standards or lack of automated process. Here are the broad ways that can help you overcome supply chain financing.

1. Use digitization to create a larger pool of financing and offer various financing options: Gone are the days when supply chain financing was restricted to large factoring companies. The latest trend is about expanded reach. The robust platforms help ease communication and allow the transfer of funds seamlessly, enabling both the buyer and supplier to manage and track things faster. It also opens the scope for financing by engaging financial institutions like – Banks/NBFCs.

2. Harness the power of blockchain: With blockchain technology, the whole process of supply chain financing becomes hassle-free. Buyers order products directly from a supplier. Then, the supplier receives the order, along with the buyer’s credit score. A ‘smart contract’ gets embedded within the blockchain and rejects or confirms the shipment accordingly.  After network approval, the updated hash value is added to the header of the new block and added to the cryptographic chain of blocks. Hence, a new block is added to the chain providing an immutable and transparent historical record of transactions. Finally, the blockchain transfers the money from the buyer to the supplier.

3. Find your digital trusted partner for supply chain financing: Collaborate with trusted fintech brands who enable MSMEs to access efficient credit with a best-in-class user experience. Here at Mynd Fintech, we focus on effectively leveraging public and private data to develop digital risk algorithms that enable real-time risk assessments with high accuracy. We collaborate with multiple lending partners – Banks and NBFCs to facilitate access to capital across a broad spectrum, ensuring a win-win situation for all the entities involved.

New Innovations

Here are the top trends in supply chain finance technology emerging in 2022.

1. Collaboration of human capabilities with Advanced Technologies: With human capabilities like – critical thinking, client relation and logical implementation, the entire process of data analysis, payment exchange, and documentation take the supply chain to the next level.

2. Switch to electronic format: Backed by data analytics, technologies automate the process of exchanging relevant information, documents and payments among buyers, suppliers and financial institutions. That’s how the visibility of the overall supply chain finance process gets improved for all parties.

3. Risk management solutions: Technologies like – Artificial Intelligence and Machine Learning help assess credit risk. That’s how the real-time prediction of fraud and threats is eliminated.

4. Employ technology to build a more extensive network of suppliers: With the expansion of supply chain finance, multiple players offer less documentation, instant financing and other value-added services. The buyers would get supplier options, have a negotiation hand and avail themselves of the attractive discounts. The robust technology platforms help ease communication and make fund transfers seamless.

A Brighter Future of Supply Chain Financing

Supply chain finance is a powerful tool for businesses to expand and grow. It allows the smooth movement of goods between buyers and sellers, which results in lower costs for the parties involved. So, in this way, you manage your cash flow properly and pay off suppliers faster than you usually can do alone.

Conclusion:

Supply chain finance is an excellent means to help businesses manage their cash flow. It makes it easier for them to pay bills on time without worrying about how they can afford extra expenses later. SCF adds flexibility to the company’s finances by allowing them to access capital whenever needed, without sacrificing security or stability. Here at Mynd Fintech’s digital supply chain financing platform, we empower MSMEs by providing them with easy and quick funding via multiple lending partners and making financing seamless.

FAQs:

Q1.   Why is supply chain finance important?

Ans. Supply chain finance is essential to maintain good relations with buyers and sellers. The buyers can do financing more quickly than the supplier. The supplier doesn’t have to use its funds during the financing process.

Q2. What is digital supply chain finance?

Ans. Digital supply chain finance provides quick collateral-free working capital solutions to the suppliers.

Q3. How does supply chain finance benefit both buyers and suppliers?

Ans. Supply chain finance helps buyers improve their working capital position and harmonize supplier payment terms. At the same time, it allows suppliers to receive payment for their invoices earlier than they would otherwise receive.