In India, every business depends on the availability of credit or cash itself. Companies are constantly looking for various ways to access some money. They are looking for postponing payment for reasonable terms and conditions to the creditors.
In contrast, the suppliers are looking for ways to augment the working capital and reduced cash cycles. This tension between the two creates the need for supply chain finance in India. The buyer wants a flexible term of payment where the suppliers have a shorter cash cycle.
Moreover, the physical supply chain gets optimized, and it is hard for the firms to realize savings while managing both ends. It prompts the supply chain manager to offer special attention to the sector of financial flow. It also forms an essential part of the business operation continuum. Hence, whatever business you indulge in, you would attempt to optimize the industry’s supply chain and financial flow.
The process of supply chain helping in the growth plan
Before we understand how supply chain financing is helping in the growth plan of a business, we need to understand what is supply chain. In simple terms, it is short-term working capital finance. Every supplier or dealer can avail of this to optimize their working capital requirements. The process involves every enterprise getting its supplier payments with the help of external financing. It is a mix of financial instruments, including overdraft and bill discounting. Moreover, the process focuses on optimizing the flexibility and economic growth of the customer.
The process of supply chain financing improves the efficiency of any small business in the following way:
- Supply chain finance tends to be an official agreement between the supplier and buyer. Here the supplier acts as the financier.
- The supplier raises the invoice of the supplied goods, shipped goods, or any services provided to the buyer.
- The supplier sends the same invoice to the financer’s platform of supply chain finance.
- The buyer tends to approve the invoice sent by the supplier on the same platform of the supply chain.
- The financier pays the supplier against the invoice that it receives
- The last step includes debiting the buyer’s account by the financer when the invoice gets matured.
Benefits of incorporating supply chain financing
There are numerous benefits that supply chain finance offers to manufacturers, dealers, and suppliers.
In the case of the manufacturer
- It helps to minimize the working capital investment
- It helps in reducing the cost of goods sold
- Automation tends to reduce the cost of administration
- It also helps to reduce the total borrowing cost
In the case of a dealer
- It offers working capital that helps in the purchase of inventory
- The funds come at a lower cost than any other working capital products
- It improves the financial discipline because of the shorter duration credit
- The automation tends to decrease the administration cost
In the case of supplier
- It increases the cash flow
- It provides financing for the post-shipment
- Early payment somehow reduces the financial dependency
- It never reaches the buyers’ credit rating and reduces the cost of capital
India and supply chain finance
Sometimes the small and medium business enterprises require loans. But the loan requires collateral and a higher interest rate. It constricts cash flow. The supply chain financing in India involves the smallest sums. One can repay this sum quickly. Also, the borrowers need not have to put up any collateral. Moreover, the cash that the borrowers lend can use for any purpose. There is no restriction on it.