This blog discussed the benefits of supply chain finance for SMEs and how it can empower the SMEs to efficiently manage the complexities of today’s market dynamics -
Supply chain finance is a financial solution that helps businesses manage their cash flow by managing the timing of payments between buyers and suppliers. It is a way for businesses to get the money they need to keep their operations running smoothly. It is like a cash flow solution that helps businesses free up the funds that are stuck in their supply chains.
Sometimes, when businesses buy and sell goods across a large network, they have to wait a long time to get paid. Supply chain finance helps by providing financing options for all the different parts of the supply chain. It is like a big umbrella term that includes different ways to get money for the different steps in the supply chain. Overall, it is a helpful financial tool for small and medium businesses to manage their finances and keep things moving.
Let us now understand how this financial tool of supply chain finance augments the operational efficacy of SMEs. It is like a win-win collaboration where larger companies use their strong financial base and creditworthiness to support smaller suppliers. When a supplier delivers goods or services to a buyer, instead of waiting for a long time to get paid, the supplier can receive early payment from the financial institution. This helps the supplier unlock its working capital and have the necessary funds to meet their expenses or invest in growth opportunities. It is also a great way to strengthen relationships and ensure smoother transactions in the supply chain.
Here is a detailed breakdown discussion surrounding the wide range of benefits that accrue to SMEs owing to supply chain finance –
SMEs often struggle with limited access to working capital, which can hinder their growth and operations. Supply chain finance enables SMEs to unlock the trapped capital in their supply chains by accelerating payment for goods and services supplied to larger buyers. This timely infusion of funds helps SMEs cover expenses, invest in growth initiatives, and maintain a healthy cash flow.
Cash flow management is vital for SMEs to meet their day-to-day expenses, manage inventory, and pay suppliers promptly. Delayed payments from buyers can disrupt cash flow, leading to operational challenges. Supply chain finance offers SMEs the option to receive early payments from financial institutions based on approved invoices, ensuring a steady cash flow to sustain their operations and financial stability.
SMEs may face challenges in accessing affordable financing due to limited credit histories or collateral. Traditional loans may come with high-interest rates, making it difficult for SMEs to obtain necessary funds without compromising profitability. Supply chain finance leverages the creditworthiness of larger buyers to offer lower-cost financing options to SMEs. This access to affordable capital enables SMEs to invest in expansion, research and development, and innovation.
SMEs often depend on a few key buyers for a significant portion of their business. Late payments or financial uncertainty can strain these relationships, impacting future business opportunities. Supply chain finance allows easy space for collaboration and trust between SMEs and their buyers by providing early payment options. This internal financial arrangement not only strengthens supplier-buyer relationships, but also encourages repeat business, and opens doors to larger contracts and growth opportunities.
Supply chain disruptions can significantly impact SMEs, especially when they lack financial resilience. Supply chain finance provides SMEs with the necessary financial stability to withstand disruptions and mitigate risks. By ensuring prompt payments to suppliers, SMEs can secure their supply chain, maintain inventory levels, and fulfill customer demands, even during challenging times of economic crisis.
Now that we understand the role and relevance of supply chain finance for small and medium enterprises, let us go through its operational framework. For ease of understanding, let us take a look at how supply chain finance works using an example where the seller is A and the finance provider is B.
Step 1: A is a small manufacturer that supplies goods to a big retail chain called Z.
Step 2: A sends an invoice to Z for the goods they delivered, with a payment term of say, 90 days.
Step 3: A approaches B, a financial institution that specializes in supply chain finance, to request early payment for the outstanding invoice.
Step 4: B evaluates A’s creditworthiness, the authenticity of the invoice, and their relationship with Z Stores to understand the underlying risks.
Step 5: On the basis of the evaluation, B approves A’s financing request and pays A, a percentage of the invoice value, say 85%.
Step 6: As A agrees to the offer, B transfers 85% of the invoice value to A’s bank account, thereby providing immediate access to funds to A.
Step 7: When the payment due date arrives, Z pays the full invoice amount directly to B as per the original payment terms that were decided at the time of buying the goods.
Step 8: B deducts its fees for providing the supply chain finance service to A and remits the remaining 15% of the invoice amount to A.
Because of early payment received from B, A can cover production costs, pay suppliers promptly, or invest in growth opportunities, ensuring smoother cash flow for their business. In this example, supply chain finance enables A, the seller, to access funds early, improving their working capital and financial stability. B, the finance provider, benefits by earning fees for facilitating the transaction. Meanwhile, Z - the buyer, maintains their standard payment terms with A while indirectly supporting their supplier’s financial well-being.
Thus, supply chain finance helps SMEs by getting them the money they need, keeping their cash flow healthy, building strong relationships, offering affordable financing, managing risks, and making administrative tasks easier. It’s a valuable tool for SMEs to overcome financial challenges, become more competitive, and achieve long-term growth.