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Any company, big or small, needs a working capital for the purpose of day-to-day operations and maintenance, along with immediate or future investments. But what happens when important clients delay the payment?

It can bring the soaring business to a screeching halt in a matter of days. The situation can get worse for small and medium enterprises (SMEs). However, there is a way out where the supplier doesn’t have to wait for the payments and can go about his business as usual. Say hello to Supply Chain Finance, your saviour that improves your cash flows and eliminates crisis.

What is Supply Chain Finance (SCF)?

Most businesses start operations with multiple loans and getting another loan sanctioned can prove to be extremely risky and they need to make sure that there’s a steady cash flow to run businesses smoothly. If the customer wants time to repay the debts, the supplier can opt for SCF. Simply put, it’s a process of selling the accounts receivable at a discounted rate to a third party known as the factoring company in lieu of payment without any delays, allowing a steady cash flow.  

If one studies the reasons why one has to rely on SCF, it will be discovered that the root cause lies in the mismanagement of cash flow. An ideal situation is to have a positive cash flow where more money is coming in compared to that is going out.

What happens if you don’t manage your cash flows?

If you don’t manage your cash flows, the business will land in deep water by leading to following unwanted situations:

  1. Too much stock because of less demand: If you buy extra raw materials after getting excited by the first sale or in anticipation of a big order, but ultimately no fresh orders come, you will have a huge stock to create products with no buyers around and very little cash in the account. 

  2. Shortage of cash due to long payment terms: It’s important to hold on to clients but giving the long payment terms isn’t healthy. Shortage of cash can lead you to lose many potential clients.

  3. Overspending on your new clients: Some businessmen go overboard for luring in new clients by spending on not-so-important things like infrastructure and decoration. Well, put the money in production, get the payment and then spend it.  

  4. Overtrading related to expanding the business: The prospect of growth can excite anyone but hiring new employees or opening new centres is not a wise decision at a nascent stage with cash flow still not in place.


Benefits of Supply Chain Finance

Among the many benefits of SCF are:

  1. Risk Mitigation: It lies in the reputation of the buyers and so, the supplier won’t be troubled if the buyers don’t fulfil the term conditions.  

  2. Management of working capital: It allows enough working capital to run the business with almost 80% of the payment being funded immediately.

  3. Manage cash flow effectively: With a steady cash flow, it makes calculations and planning easier.  

  4. Operational improvement: With the money in hand, one can look at what needs to be added/bought for maximizing operations and lowering maintenance costs. 

  5. Reduce the cost: Factoring companies give heavy discounts on factors like creditworthiness of suppliers’ clients; the former’s billing methods and history, type of industry etc. Chances are that you will get about 80% of the payment and a nominal fee and interest rate will be levied on the remaining 20% till it’s paid.   

  6. Improve the returns: It also allows you to go for bigger orders and thus, get better returns. It also improves credit scores with proper details of money invested and revenue generated.  

  7. Manage inventory more effectively: From water cooler and coffee machine to latest equipment for better production, one can spend on inventory.     

  8. Pay your suppliers faster: The first invoice clearance can take up to two-three days after an account is made due to thorough verification but the subsequent invoice funding takes place in next 24 hours of the request made, allowing the supplier or buyer to pay quickly.  

Supply Chain Finance is an innovative way of pumping more money into the business by treating business’s outstanding invoices or bills as collaterals. Many companies today opt for SCF on a regular basis to maximize cash flow, improve credit scores and brand reputation, develop a sense of trust among lenders and buyers and thus, improve their chances of taking on new opportunities.

Did You Know


The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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