Business Loans vs Supply Chain Financing: What Should SMEs and Startups Opt For?

For startups and SMEs, financial stability is crucial to growth, scalability, and handling day-to-day operations. With a variety of financing options available, choosing the right one can be overwhelming. We decipher these for you by putting them into two broad categories: business loans and supply chain financing (SCF). Each serves unique purposes, and understanding their nuances is key to making an informed choice.

In this guide, we’ll examine the popular financing options available under both categories, highlight their key differences, and provide actionable insights to help you choose the most suitable one for your business needs.

The Importance of Financing for Startups and SMEs

Business loans or supply chain financing solutions serve as more than just financial support—they are catalysts for growth. They enable businesses to:

• Bridge cash flow gaps in the business
• Manage working capital for seamless operations.
• Expand into new markets or geographies.
• Invest in technology, machinery, or workforce.
• Tackle unforeseen challenges, like supply chain disruptions or cash flow issues.

Understanding Business Loans

Business loans are traditional financial products offered by banks, NBFCs, and other lenders, designed to meet various business needs. These loans typically involve borrowing a lump sum with repayment through fixed EMIs over a specified period.

Common types of Business Loans

1. Term Loans
   They are lump sum loans with a fixed repayment schedule over a predetermined period. Term loans are mostly used by businesses to expand production facilities, acquire new technology, or start a new product line.
   

• Best for: Long-term investments for setting up new facilities, expanding into new geographies, & so forth.‍
• Key Features:‍
  • Loan tenure: Typically 1–10 years, depending on the purpose.
  • Collateral: Often required, such as real estate or equipment.
  • Repayment: Fixed EMIs or bullet payments.‍
• Pro Insight: Interest rates range from 8.5% to 12% for secured loans, while unsecured loans may reach 15%.‍

          Some MSME-specific Government Loans include:‍

• Mudra Loans
• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
• Stand Up India Scheme‍
  

2. Working Capital Loans
   These are short-term financing loans to address immediate operational needs. Let’s say your business wants to purchase inventory, pay suppliers, or manage the payroll. In such situations, opting for working capital loans could fund day-to-day operational expenses.
   These loans can be secured or unsecured, depending on the company's financial health and required loan amount.
   A working capital loan is not intended for the purchase of capital assets or the expansion of a business. Rather, it is used to meet short-term financial commitments and maintain daily operations.

• Key Features:
  • Loan tenure: 6 months to 3 years, depending on the purpose and terms of agreement.
  • Often offered as an overdraft or cash credit facility.
  • High-interest rates (12–18%) due to shorter tenure.
• Advantages:
  
  • Keeps daily operations running smoothly.
  • No need to compromise long-term assets.‍
• Pro Insight: Businesses with high seasonal demand (e.g. FMCG) can strategically use working capital loans during peak seasons to maximize profitability.
  

3. Equipment Financing
   ‍These loans are exclusively designed for purchasing machinery or production equipment.
   

• Best for: Manufacturing units or tech startups investing in production tools or hardware.
• Key Features:
  • Loan tenure: Matches the equipment's expected life span.
  • Interest rates: 8–14%, often lower due to collateralization.
• ‍Advantages:
  
  • Swift access to funds to adopt the latest technology for your business.
  • Tax benefits: Depreciation on machinery may be tax-deductible
• Pro Insight: Compare leasing versus machinery loans to determine the most cost-effective option.

4. Loan Against Property (LAP)
   Loan Against Property (LAP) is a secured loan where businesses or individuals pledge their commercial or residential property as collateral to raise funds. It is one of the most versatile funding options for business owners due to its high loan amount and flexible usage.
   

• Key Features:
  • Loan amount is typically 50%–80% of the property's market value.
  • Long repayment periods ranging from 5 to 15 years.
  • Competitive rates, usually between 8%–12%, as it is a secured loan.
• Usage:
  • Expansion of business operations.
  • Purchase of inventory or machinery.
• Advantages:‍
  • Lower Interest Rates: Cheaper compared to unsecured business loans.
  • Flexibility in Usage: Funds can be used for any business-related purpose.
  • Longer Tenure: Reduces EMI burden.‍
• Limitations:‍
  • Risk of Asset Loss: Failure to repay could lead to foreclosure.
  • Processing Time: Longer approval times due to property evaluation.‍
• Pro Insight: Loan against property can actually be used for refinancing existing high-cost debt.

Understanding Supply Chain Financing (SCF)

Supply Chain Financing is a modern financing approach that optimizes cash flow within the supply chain, benefiting both buyers and suppliers. Fundamentally, buyers & suppliers, in collaboration with financial institutions,  establish a mechanism that optimizes working capital and provides liquidity to both ends of the transaction. Additionally, Supply Chain Finance platforms simplify invoice approval and settlement processes, automating the entire journey from initiation to completion.

1. Sales Invoice Discounting (Factoring)
   One of the most powerful financial tools, Sales Invoice Discounting allows businesses to unlock immediate liquidity by leveraging unpaid invoices. These are best for businesses with long payment cycles that need immediate liquidity. Here, if the financier buys the invoices outright and takes responsibility for collections then it's called Factoring.
   

• Key Features:
  • Funding amounts range from 80–90% of invoice value.
  • A fee of 1–3% of the invoice amount  is charged by the lender.‍
• Advantages
  • Improves Cash Flow
    • Provides immediate access to working capital tied up in unpaid invoices.
    • Helps businesses meet operational expenses, payroll, and supplier payments without delay.‍
  • Maintains Control
    • The business retains control over its sales ledger and customer relationships.
    • Unlike factoring, the customer is usually unaware of the arrangement.‍
  • Brings Scalability
    • The funding grows as sales and invoice volumes increase.
    • No need for fixed loan limits.‍
  • No Asset Collateral
    • Unsecured in many cases; relies on the quality of the receivables.‍
  • Cost-Effective and Flexible
    • You only pay a fee for the invoices discounted, potentially making it cheaper than traditional loans.
    • Businesses are allowed to choose which invoices to discount.‍
• Limitations
  • Cost‍
    • Fees can be higher compared to traditional loans.
    • Businesses might face additional charges for late payments or mismanagement.‍
  • Eligibility Requirements‍
    • Companies need a strong track record of on-time payments from their customers.
    • Startups and businesses with inconsistent receivables may find it hard to qualify.‍
  • Credit Risk‍
    • Risk if customers delay payments or default.
    • Some lenders offer non-recourse options, but at higher costs.‍
• Pro Insight: Supply Chain Financing Platforms like BizongoFin are designed to work through these limitations & SMEs should leverage the power of such platforms. With a robust network of financial institutions, and a business-first approach, BizongoFin ensures that access to capital is unlocked with speed and trust.
• Use Cases
  • Seasonal Businesses: Retailers and manufacturers that experience seasonal fluctuations can ensure steady cash flow during lean periods.‍
  • Rapid Growth Companies: Businesses scaling quickly can use invoice discounting to fund operations without waiting for receivables.‍
  • Supply Chain Management: Companies needing to pay suppliers upfront while awaiting customer payments.‍
  • Exporters: Facilitates smooth cash flow for businesses dealing with international clients who might have longer payment cycles.‍
  • Service Providers: Agencies, consultants, and service-based businesses can use invoice discounting to manage payroll and project expenses.

2. Purchase Invoice Discounting (Reverse Factoring)‍
   Purchase invoice discounting allows a buyer (such as a retailer) to secure immediate cash against their outstanding purchase invoices. This is particularly useful for businesses that need to pay suppliers quickly while extending their payment terms.
   The key features and benefits of PID are similar to those of SID, but with few key differences highlighted below:‍

• ‍Choosing Between Sales and Purchase Invoice Discounting
  • Sales Invoice Discounting is better if your cash flow is affected by slow-paying customers and you want to unlock funds tied up in receivables.
  • Purchase Invoice Discounting is suitable if you’re struggling to pay suppliers on time or want to take advantage of early payment discounts.
• Advantages
  • Supplier Relations: Ensures timely payment to suppliers, strengthening relationships whereas SID is more focused on freeing up working capital tied in receivables.‍
  • Discount Benefits: Businesses may secure early payment discounts from suppliers.‍
  • Operational Continuity: Avoid production or project delays due to cash flow shortages.‍
• Limitations
  • Repayment Obligation: Business must repay the financier irrespective of cash flow availability.‍
  • Cost of Financing: Interest and fees can add to operating costs.‍
  • Supplier Restrictions: Not all suppliers may accept third-party payments.

3. Purchase Order (PO) Financing‍
   PO Financing helps businesses secure the funds they need to fulfill customer orders when they lack immediate working capital. Imagine a business receives a large order but doesn't have the cash flow to buy raw materials or produce goods. PO financing bridges this gap, ensuring order fulfillment without financial strain.

• Key Features:
  • Loan tenure: Typically aligned with the order fulfillment cycle (30–120 days).
  • Loan amount: Based on the value of the purchase order.
  • Requires a valid purchase order from a creditworthy customer.
• Advantages:
  • Enables businesses to take on larger orders.
  • Preserves cash flow for other operational needs.
  • Reduces the risk of losing valuable customers due to financial constraints.
• Pro Insight: Startups and SMEs can use PO financing to scale operations without relying on traditional loans or equity dilution.
  

4. Inventory Financing
   Inventory financing provides businesses with funds to purchase or stockpile inventory, especially during peak seasons or in anticipation of high demand. It’s a collateral-based loan where the inventory acts as security.

• Key Features:
  • Loan tenure: 3 months to 1 year, depending on inventory turnover cycles.
  • Loan amount: Based on the value of the inventory purchased.
  • Interest rates: Typically moderate, ranging from 10–15%.
• Advantages:
  • Helps businesses meet seasonal demand spikes.
  • Avoids stockouts and improves customer satisfaction.
  • Frees up cash flow for other operational expenses.
• Pro Insight: Retailers and e-commerce businesses can leverage inventory financing to optimize stock levels and negotiate bulk purchase discounts with suppliers.

5. Structured Trade Finance
   Structured Trade Finance (STF) is a specialized form of financing designed to facilitate complex trade transactions, especially where complex supply chains are involved. It supports businesses in managing risks and improving cash flow throughout the supply chain.

• Key Features:
  • Tools include documentary credit, export factoring, and trade insurance.
  • Loan tenure: Typically matches trade cycles (30 days to 1 year).
  • Covers pre-shipment and post-shipment financing needs.
• Advantages:
  • Mitigates risks associated with currency fluctuations and payment delays.
  • Ensures smooth cash flow for exporters and importers.
  • Builds trust with international buyers and suppliers.
• Pro Insight: Businesses trading in volatile markets can use STF to hedge risks while expanding their global footprint.‍

            Import/Export Finance is a specific type of Trade Finance, that focuses specifically on cross-border trade, providing businesses with           solutions like letters of credit, export credit, or trade guarantees to secure international transactions.

         Structured trade finance is particularly beneficial for businesses dealing with high-value or bulk commodities, offering customized solutions          to meet their unique needs.

Business Loans vs Supply Chain Financing: Key Differences

How to Choose the Right Financing Option

Choosing the right financing involves aligning your business needs with the financing terms. Here's how to evaluate your options:

• Understand the Purpose: For growth-oriented investments, choose term loans. For operational gaps, working capital loans are ideal. Know the why behind the financing option.
• Evaluate Costs: Compare interest rates, know the processing fees, prepayment penalties, and hidden charges while calculating the total loan amount.
• Plan for Repayment: Match the repayment tenure with your cash flow cycles to ensure seamless repayment.

Want to know which type of financing option you should opt for?

BizongoFin: Business Financing You can Trust

• Expertise in SME and Startup Financing: Tailored solutions to meet unique business needs.
• Tech-Enabled Platform: Fast approvals and transparent processes, ensuring speed.
• Network of Trusted Lenders: Access 30+ trusted banks, NBFCs, and FI platforms.

Conclusion

The right financing option can fuel your business’s journey from survival to success. By understanding the nuances of each financing option, startups and SMEs can align their needs with market opportunities.

At BizongoFin, we simplify this process with tailored solutions and expert guidance.
Ready to unlock growth? Contact us today 👉+91 9321406788