The Covid Crisis showed how companies need to leverage technology and upgrade existing Supply Chain systems via every available channel, be it E-commerce or brick and mortar. As per a report by Arthur D Little & CII, India’s supply chain costs account for 14% (vis-a-vis global 8%), thus creating a competitive gap of $180 billion.
When it comes to financing trades, institutions offer credit based on the past records of companies. As per the ET Magazine Survey, many MSMEs recover more than half their receivables after more than 90 days. About 17% of MSMEs write off one-fifth of their debt every year. This highlights the need to create an inclusive financing environment for all firms.
Since one product doesn’t fit all business needs, a strong & flexible Supply Chain Finance system is required.
How Supply Chain Finance Has Changed Over the Years?
Banks process loans based on a company’s purchases, turnover, and past profits, limiting credit availability. For small businesses, equity becomes a costly and less efficient method. Traditional Discounting programs also negatively affect businesses as it encourages companies to give a higher discount for early payment.
Here’s How Supply Chain Finance is Different and helps businesses:
A company’s cash flows revolve around two processes.
1) The Physical Supply Chain (Goods flow from Suppliers to Customer), and
2) The Financial Support (Money flows from Customer to company)
A. The supplier (say, Tyres manufacturer) issues an invoice to the buyer (say an OEM) with a 45-day credit.
B. The OEM confirms to the Supply Chain lender ( say, the Bank) that the invoice is good for payment.
C. Tyres manufacturer gets the payment from the Bank straight away TODAY (minus a small fee).
D. When payment is due, the OEM pays the Bank.
This helps stabilize the supplier’s cash flow instead of waiting for the standard ‘payment due date’ (which is 45 days here but could be as long as 120 days). The buyer/anchor benefits because of the extended payment terms with working capital, while the lender takes the payment delay.
Why is Supply Chain Finance Popular?
The E-Commerce Industry thrived in 2020-21 and caused an increased demand for Supply Chain Finance. It caused new financial institutions to come up with new fintech solutions to provide supply chain funding by using technology and digitization. Cloud-based apps helped many financial institutions pull more resources without a rise in the funding cost.
Global trade practices have shifted to ‘Open Account’, which facilitates the delivery of goods before the payment receipt. This brings in more customers who want to use flexible trade finance techniques as per their convenience in the Supply Chain cycle. RBI’s Co Lending Scheme supports credit availability to priority sectors in India, where banks and NBFCs can co-lend together.
Supply Chain financing saves the banking system from bearing all economic losses incurred by corporations. This also leads to banks falling upon legal options like The Insolvency and Bankruptcy Code 2016 to sue the borrower for unpaid debt. This leaves the borrower with two options:
1. To complete the debt resolution process in a certain period of time and continue the business, or
2. Let the banks take ridiculous haircuts (or write-offs) on repayments. This leads the borrower’s business to shut down.
Supply Chain Finance platforms like YubiFlow help ease this process by providing targeted ‘function-specific solutions instead of a general offer. They simplify financing for all global participants by the use of technology and agility. By using innovation in debt facilitation platforms, they help ease real-time business expansion.
What Debt Products does Supply Chain Finance introduce?
Supply Chain finance is gaining traction with new full-fledged online intermediaries. Yubi offers flexible debt options via brilliant platforms like ‘YubiFlow’. The intention is to provide finance based on the viability of each function instead of relying on the entire business capability.
Their products to finance Vendors include financing Purchase and Sales invoices. This helps Suppliers receive credit before it is due.
Yubi’s supply chain platform ‘Yubi Flow’ also provides low-cost methods of financing a business’s receivables by accepting receivables from both suppliers and buyers, and providing capital at a lower spread.
They also offer a unique Dynamic Discounting Model, where buyers pay early in exchange for cash discounts. E.g., Financing buyers who opt for the ‘2/10 net 30’ offer of the company.
YubiFlow supports Anchors by providing Sales Invoice discounting and PO Financing. This helps in better management of credit and increases cash flow.
Supply Chain Finance is the need of the hour, and Yubi through its supply chain finance platform, YubiFlow, is changing the landscape. With its myriad offerings, increased efficiency, advanced monitoring, and multiple onboarded lenders, it is not only solving the problem of discoverability in the Supply Chain Finance market, but it also provides secure digital processing with a blockchain-based verification system, and reduced acquisition costs.