How SMEs can leverage Supply Chain Financing for Credit Access & Growth

Here’s what The World Bank has to say about Small and Medium Enterprises (SMEs): SMEs play a major role in most economies. They account for most businesses worldwide and are important contributors to job creation and global economic development.

All true, all noteworthy, and all-powerful facts about the importance of SMEs. SMEs are the backbone of economic growth and social development, particularly in developing countries like India. But to strengthen this backbone, removing their barriers to growth is crucial. Many barriers are created because they struggle to access finance from traditional financial institutions like banks.

Supply chain finance (SCF) can help to remove these barriers and accelerate SME growth. All kinds of SMEs can benefit from SCF, a technology-enabled solution that provides short-term loans. These loans allow SMEs to close financial gaps and access much-needed liquidity. Ultimately, SCF empowers SMEs to optimise their working capital, expand operations, and successfully meet customer and market demands.

What is Supply Chain Finance?

The past few years have not been easy for Indian SMEs. In fiscal 2021, their revenues declined by 7-10% on-year. Worryingly, 66% reported declining profitability on the back of falling revenues and persistent fixed costs. These are not happy numbers for India’s 6.3 crore micro and SME units and 11.10 crore MSME workers.

And while the crisis seems to be easing in fiscal 2022, a majority of SMEs still struggle to access much-needed low-cost financing from traditional lenders. The reason: lenders don’t feel confident about lending to SMEs because the latter often cannot provide up-to-date financial statements, adequate data, or high-quality collateral – all of which are needed to sway lenders’ lending decisions in the borrower’s favour. It doesn’t help that many low- and medium-risk SME borrowers are now part of the high-risk category, further adding to banks’ unwillingness to lend to them.

Supply Chain Financing is a low-cost, technology-enabled, collateral-free financing option that allows SMEs to access short-term credit and improve liquidity. In the SME sector, SCF has increasingly become synonymous with “easy financing” since it provides the loans these firms need to expand operations and improve cash flows. Also, they can avail of SCF without getting into long-term lending contracts or worrying about strict repayment schedules.

The Need for Supply Chain Financing for Credit-starved SMEs

The COVID-19 crisis has shown exactly why credit access is a serious and ongoing problem for SMEs. Amid supply chain disruptions and the resultant demand slowdowns, crores of Indian SMEs found themselves with liquidity problems. Inconsistent cashflows and falling revenues forced 66% of them to temporarily shut down operations. This was when they desperately needed low-cost credit. 

Long repayment cycles and need for liquidity: SMEs’ liquidity problems worsen when their large creditors delay payments. Recent research by CRISIL reveals that the metric for “average debtor days” has gone up to 66.5 days for Indian SMEs. This significant period forces SMEs to look for other avenues to improve liquidity. 

High cost of debt sourced from informal sources: Often, they are forced to resort to high-cost debt from informal lenders to keep the lights on. Ultimately, when SMEs receive limited support from the formal banking system, it creates a vicious cycle of high borrowing costs, working capital gaps, falling profitability, and stunted growth.

Supply Chain Financing can provide a solution to these challenges. SCF provides lenders with new-age technology that enables them to assess the creditworthiness of SME borrowers and extend financing to previously underserved or unserved SMEs. Numerous SCF solutions are now available to finance SMEs, including vendor and dealer financing.

How Supply Chain Financing Works

An SCF technology finances the underlying trade transaction between an anchor and their channel partners and isolates the credit risk associated with a transaction. It improves business efficiency for anchor and channel partners and lowers the financing costs for both.

Due to the risk isolation process, SMEs no longer have to worry about their loan applications getting rejected. Instead, they can easily access the finance they need based on who they buy from or sell to and the invoice for that buy or sell transaction. The interest rate of SCF is typically lower than traditional financing options like working capital loans. Plus, borrowers don’t have to provide any collateral. A benefit for the lender is that each loan disbursal finances an underlying trade transaction, so they always know how their funds will be used.

The anchor company initiates the SCF process. It represents their agreement to approve a supplier’s invoices for financing by a bank and their commitment to repay the bank at a specified date. The bank then extends a line of credit (LOC) – at a fee – that helps finance the purchase of goods. This is why SCF is also known as purchase finance. Another common term for SCF is reverse factoring.

How do SMEs and their Buyers Benefit from Supply Chain Financing

SCF offers multiple advantages to both SMEs and their buyers.

How do both SMEs (suppliers ) and their anchors benefit from SCF

In a traditional transaction between the anchor (principal company) and SMEs (channel partners), the former will try to delay payments while the latter will try to get paid as soon as possible. This affects the dynamic between the parties and is usually disadvantageous to the channel partners. SCF eliminates this imbalance since the supplier gets paid immediately while the anchor gets some flexibility to pay their invoices at a later date.

Another benefit of SCF is that it provides short-term credit to optimise working capital for anchors and channel partners. It also provides liquidity to both parties. Furthermore, both parties can use the cash on hand to fund new projects and keep their operations running smoothly.

How do SMEs benefit from SCF 

SCF enables SMEs to access larger volumes of credit from lenders. This access is based on the type and volume of their trade transactions rather than their credit rating or financial position. 

Flexible, collateral-free funds: The funds, through an SCF program, are made available without collateral, without a strict repayment schedule, and at lower interest rates compared to the rates they would have to pay if banks only considered their finances and assets.

Immediate access to funds: Another benefit for SMEs is that they receive immediate payment from the bank for their goods. They can, therefore, quickly unload their products, speed up the sales cycle, earn more revenues, and improve profitability. 

Here’s how Systech Services Pvt Ltd increased revenues by 35% using SCF. 

Here’s how Sri Sai Creation’s sales soared after coming onboard an SCF platform. 

Improved Cash Flow: SCF also positively impacts SME cash flows and can help them enhance their credit ratings. All these benefits empower SMEs to pursue more growth opportunities in the market.

SCF is particularly useful for SMEs when they are struggling to overcome the impact of supply chain disruptions and demand slowdowns. During such times, the lack of credit from traditional lenders will not affect their working capital or liquidity to an appreciable extent.

SMEs can also benefit from SCF if they are the anchors. They can source raw materials or other goods/services from suppliers at a low cost to improve their margins. They can also ask suppliers for cash discounts in exchange for making timely payments, which will again positively impact their cash flows and bottom lines.

How do principal companies benefit from SCF 

Negotiable repayment terms: SCF enables anchors to negotiate better terms from the channel partners, such as extended payment schedules or cash discounts. They also indirectly benefit when larger proportions of their supply chain can access cheaper liquidity. Their suppliers can keep their own operations and production running, thus providing uninterrupted, predictable, and timely delivery of goods or services to the buyer.

Simplified accounts payable: SCF also simplifies accounts payable for buyers since they can pay off the invoices of multiple suppliers through a single lender. Here’s where online SCF platforms like Yubi Flow come in. Yubi Flow has already helped many companies to settle their vendor bills quickly. 

Here’s how Bizongo used Yubi’s Supply Chain Finance Marketplace to settle its vendor bills in under 24 hours. 

With such platforms, anchors, channel partners, and lenders can easily connect with each other to streamline SCF and ensure efficient, seamless trade transactions that generate tangible benefits for all of them.

Technology-Driven Supply Chain Financing: Redefining Financing for India’s SMEs

SCF is powered by new-age technology to address SMEs’ credit woes and create new business opportunities. And Yubi Flow is at the forefront of this technology-powered SME financing revolution.

Yubi Flow is a fully digitised, user-friendly SCF platform that’s redefining the rules of lending to SMEs. As a one-stop solution, Yubi Flow finances the entire supply chain and creates dramatic benefits for anchors, lenders, and channel partners. It seamlessly connects anchors with investors to finance their supply chains and help them strengthen their channel partner ecosystem.

Since Yubi Flow digitises the onboarding process, all SMEs or their buyers must do is upload their sales/purchase invoices. The platform will ensure same-day disbursement. It also removes the complexities associated with traditional borrowing processes, such as mountains of paperwork, opaque workflows, and unnecessary delays, thus helping to speed up SCF transactions and lowering the cost for all parties. 

Get started with Yubi Flow for free. Click here to take the first step.