What is Supply Chain Finance?
Liquidity is the lifeblood of a business. To run a successful business, it is essential to maintain a steady flow of funds. When a company sells goods on credit, the money gets blocked until the payment is received. Usually, this gap is around 1 to 6 months. This means the business needs to invest additional funds every time it sells its product or services, which is often not feasible.
On the other hand, Supply Chain Finance (SCF) allows the suppliers to get their invoices discounted from a bank. But, this arrangement can be made only if the buyer satisfies the credit rating criteria and has the required cash flow threshold or is a large corporation with goodwill in the market. Such a buyer is called the supply chain finance anchor. It is important to note that supply chain finance is not given as a loan. Instead, it is linked to bill discounting so businesses can maintain liquidity.
The term Supply Chain Finance (SCF) is often also referred to as:
- Supplier Finance
- Payables finance
- Supplier payments
- Approved payables finance
- Reverse factoring
Supply Chain Finance Solutions by Yubi!
5 Things You Should Know about Supply Chain Finance
- It is not a loan: Supply chain finance is not a loan. It involves reverse factoring, wherein funding requests are placed based on the supplier’s accounts receivables.
- It does not need to be tied to a single bank: Yubi enables vendors and buyers to avail supply chain finance (SCF) from an array of more than 750+ lenders and banking institutions.
- It is not factoring: Supply chain finance (SCF) is reverse factoring of the invoice by the buyer. Unlike traditional factoring, it is a buyer-led financing option as the buyer works with a financial institution for timely payments to the supplier.
- Supply chain finance is not just for large companies: SMEs and businesses of any credit rating can avail of SCF facilities at Yubi.
- It does not require a bank: Supply chain financing on Yubi works with joint support from our partner businesses, non-banking financial institutions, and the Indian capital market.
Benefits of Yubi’s Supply Chain Finance solutions
The model for supply chain finance in India is based on mutual benefit for the buyer and the supplier.
Here are the major benefits of this arrangement for both the buyers and the suppliers.
Benefits for the Supplier:
The revenue from the sales is received as soon as the anchor approves the invoice.
✓ Due to the reduced waiting time, the business’s funds are not blocked.
✓ The business can earn more revenue by increasing its turnover.
✓ The charges deducted by the bank for bill discounting are minimal. Hence, it results in much more cost savings than a business loan.
Benefits for the Buyer:
✓ The buyer doesn’t have to pay the invoice amount upfront. This reduces the need for liquidity for the anchor.
✓ The buyer has to pay only the invoice amount. No extra amount is charged.
✓ The goodwill of buyers is enhanced as banks allow bill discounting for their suppliers.
How does Supply Chain Finance Work?
A typical Supply Chain Finance includes three parties: the buyer/anchor, the supplier, and the bank. But with the development of technology, a Fintech firm is also included as the fourth party to facilitate the transactions digitally. So, here is the process of supply chain finance.
✓ The anchor must be a reputed or a large corporation for the banks to allow bill discounting.
✓ Both the buyer and the supplier must register themselves on the online fintech portal for trade and supply chain finance.
✓ The record of each invoice has to be uploaded separately.
✓ The buyer has to approve the invoice on the online portal.
✓ The bank pays the invoice amount as soon as the bill is approved. The amount is paid after deducting a small charge for the facility.
✓ At the invoice’s due date, the buyer has to pay the bill amount to the bank instead of the supplier.
Why is Supply Chain Finance for You?
You can easily manage your business’s funds using supply chain finance. With the improvement in technology, Fintech firms have joined the arrangement, and they can facilitate the supply chain finance process by providing technical solutions. The bill discounting will fill the essential working capital gap enabling your business to run smoothly.
Here are the additional benefits that you can enjoy by applying for a supply chain finance arrangement with Yubi Flow
- Automated Invoice Processing: This facility helps you manage the invoices raised and approved using the online platform. It enables end-to-end processing powered by blockchain technology.
- Anchor Onboarding Tool: This tool makes it easy for the anchor suppliers to register online and raise the bills.
- Core Banking Integration: The banking system is integrated through the online portal to manage payments and dues in real-time.
- Multiple Banking Options: Unlike a business loan, you can choose a different bank based on the charges for every invoice.
- Early Warning Signals: The most important part of supply chain finance is meeting due dates. The software will provide early warning signals for all the dues.
How much does Supply Chain Finance Cost?
Minimal charges and fees are the most significant benefits of supply chain financing. Buyers do not need to pay anything; suppliers only need to pay a small service fee if they wish to get paid early.
Types of Trading Services Offered Under Supply Chain Finance are as follows:
- Letter of Credit: A letter of credit from a bank or other financial institution assures that the institution will meet the payment terms settled between a buyer and its vendor.
- Export and Import Bills for Collections: A method of international trade finance involves importers and exporters forwarding their commercial documents to their respective banks for subsequent financing.
- Export Letter of Credit Advising: Here, an exporter forwards a letter of credit to an advising bank for expert advice and timely receipt.
- Import and Invoice Financing: Invoice finance is a convenient import financing solution wherein exporters get quick access to cash to meet liquidity & working capital needs while waiting for buyer payments.
- LC checking, Negotiation, Confirmation, and Safekeeping: Yubi offers a gamut of letter of credit services from checking & safekeeping to confirmation and collections,
- Performance Bonds: Also known as contract bonds, these are financial guarantees between two contractual parties that secure against any incidences of failed payments.
- Pre-shipment Export Finance: Pre-shipment export finance is provided to exporters to fund the exported goods’ packing, processing, and manufacturing.
- Shipping Guarantees: Shipping guarantees are joint indemnities from a consignee and a financial institution to a carrier of goods that enables the consignee to take possession of goods without a bill of lading.
Instruments of Supply Chain Finance
There are quite a few avenues for businesses to obtain supply chain finance. Some of the most commonly used financial products are:
- Reverse Factoring
- Invoice Discounting
- Invoice Factoring
- Purchase Order Financing
- Pre- & Post-Shipment Financing
- Payables Finance
- Loan Against Inventory
- Loan Against Receivables
- Distributor Finance
SBI Supply Chain Finance
The State Bank of India has introduced convenient supply chain finance solutions for businesses across India. Leveraging state-of-the-art technologies, SBI’s Supply Chain Finance offers an unified online platform to corporate organizations for financing their supply chain partners.
- Completely paperless banking and trade finance solutions
- Enables real-time fund disbursal and monitoring
- Fully customizable solution as per business requirements
- Capable of being fully integrated into any major ERP solution
Types of Supply Chain Finance Products offered by SBI:
- Electronic Vendor Financing Scheme (e-VFS): Financing solution for vendors and suppliers. Buyers can request funding requests with SBI and present authorized invoices raised by their vendors. After reviewing, e-VFS disburses funds near instantly to vendor/supplier accounts.
- Electronic Dealer Financing Scheme (e-DFS): Similar to its counterpart, e-DFS offers fast funding to dealers, distributors, franchisees, etc. Corporate selling partners raise funding requests as per invoices payable and the supply chain platform credits the seller’s account nigh instantaneously.
Supply Chain Finance Process
For our partner suppliers and buyers, the Supply Chain Financing process on Yubi is extremely simple.
- The supplier sends the invoice to the buyer as per applicable policies & terms through Yubi.
- The buyer approves of the payment terms on the invoice.
- Suppliers can log on to Yubi anytime to have a look at all approved invoices.
- Reverse factoring allows suppliers to trade invoices before maturity with a prominent lending institution, which makes the outstanding payment minus a small financing fee.
- At maturity, the buyer pays invoice amounts to the funder.
Supply chain financing offers flexible funding options, helping suppliers and buyers maintain healthy liquidity.
Supply Chain Costs and Fees: An Example with Invoice Discounting
Say there’s a supplier ABC Ltd. and a retailer XYZ.ltd. They have agreed on certain payment terms, which involved a payment of Rs. 10,00,000 after 60 days.
The seller gets the invoice approved by the buyer and then forwards it to a financier. The financier sends 80% of the outstanding invoice amount to the supplier within a few days.
The financier then collects the payment from the buyer on invoice maturity and then sends the remaining 20% of the invoice amount minus a certain fee.
It is a large corporate or an established company with a significant market reputation and honours its dues on time.
Supply Chain Financing is the process of discounting the bills payable by the bank so that the working capital gap can be filled. The suppliers to an anchor can raise their invoices and receive money as soon as they are approved. Hence, it is completely different from a loan.
With the help of Fintech solutions, the process of Supply Chain Finance has become very easy. You do not need any specialisation for the same. A basic understanding of software is enough to conduct the transactions.
The banks get multiple benefits from supply chain financing. They receive the discount charged from the suppliers, which becomes feasible due to the scale of the business. Additionally, they can cross-sell their products to the suppliers of the anchor by onboarding them to other banking solutions.
Any kind of business can avail of SCF, be it public or private, partnership or proprietorship.
Minimal tenure is 12 months but may vary as per business requirements.
Dealer financing, vendor financing, distributor financing, pre-shipment & post-shipment financing are common types.
The interest rate is calculated on the basis of the consumption of credit limit.
It all depends on the financial stability, creditworthiness, business requirements, and the nature of the applying business.