Supply Chain Finance: Meaning, Process, Features & Benefits

Companies need regular working capital to carry out their everyday operations and plan timely growth and expansion. The primary function involves delivering products or services to the B2B or B2C buyers and earning money against them. However, what if the buyers do not make their payments on time? Sometimes, it’s not feasible to stop doing business with them, but owners cannot let delayed payments bring their business to a halt. Supply chain finance helps resolve these challenges by making cash flow management easier for suppliers. It is a kind of Business Loan you can borrow from Hero FinCorp against a bill or invoice that the buyer is yet to pay. 

Below, find more information about supply chain finance meaning, process, features and benefits.

Also Read: Guide to Understanding Working Capital Loans

What Is Supply Chain Finance?

Supply chain finance is like a cash advance similar to invoice finance that enterprises can take based on their due invoices. Also known as bill discounting or invoice discounting, it is a financing option in which suppliers receive early financing on their invoices to reduce the risk of disruption in the supply chain, helping them optimise their working capital. 
 

How Does Supply Chain Finance Work?

Supply chain finance is an excellent finance arrangement for suppliers working with buyers who sometimes fail to pay their invoices on time. In a typical business transaction, buyers try to delay the invoice payment while suppliers expect the payment as soon as possible. While the buyers get more time to pay their invoices, suppliers receive immediate payments to refill their stock quickly and continue business operations with the help of supply chain financing. 

Here is what the supply chain process looks like:
 

• A buyer purchases products or services from the supplier
• The supplier issues an invoice to the buyer with the due amount and payment date
• The buyer delays the payment
• Supplier applies for supply chain finance from a reputable NBFC like Hero FinCorp against the invoice
• The financial institution evaluates the invoice and approves the loan against receivable payments with a reasonable Business Loan interest rate to the supplier 

 

The Growing Popularity of Supply Chain Finance in India

The popularity and demand for supply chain finance have grown worldwide over the last few years. India has an astonishing number of MSMEs, most of which look out for cost-effective, more convenient ways to receive funds at times. For them, supply chain finance is an excellent funding option to get their invoices paid earlier to sustain their business operations. 

Features of Supply Chain Finance

Here are a few features one must know about bill or invoice discounting:
 

• Finance up to 80% of the invoice value 
• Attractive interest rates, fast disbursal, and minimal documentation
• No collateral requirement for entities with high credit ratings
• Repayment tenure of up to 120 days

 

Benefits of Supply Chain Finance

Let’s outline how supply chain finance in India benefits a business’s supply chain process:

• More Working Capital

  Suppliers working in capital-intensive industries often feel a strain on their cash flow. The supply chain finance provides them with immediate cash to maintain their working capital needs and stay afloat.

• Low-Cost Funding

  While some suppliers have better access to credit, others take the help of supply chain finance which provides funds at a lower rate. This is crucial for those looking for low-interest finance with fast approval.

• Predictable Cash Flow

  Many buyers simply do not pay their bills on time, making it difficult to predict when the due payment will come in. However, suppliers need timely payments to continue with their business operations. Supply chain finance makes the cash flow more predictable by making funds available in nearly no time.

• Working Capital Management

  Supply chain finance provides enough working capital to the business owners, with around 80% of the invoice amount funded immediately. With instant access to capital without waiting for the buyer's direct payment, suppliers can manage their working capital efficiently.

• Improved Returns

  Timely payment through supply chain finance allows a supplier to accept bigger orders without worrying about invoice payments. Consequently, they get better returns and improve their finances with higher revenue generation.  

• Better Inventory Management

  As a company delivers products to a buyer, they can quickly refill their inventory without waiting to receive the due payment. As a result, suppliers can maintain their inventory at all times and continue taking more orders without worrying about their stock.