How Supply Chain Financing Can Grow Your Business During the Festive Season

As the festive season approaches in India, businesses prepare to capitalize on the increased consumer spending that comes with celebrations like Diwali, Eid, and Christmas. However, with this surge in demand also comes the challenge of managing cash flow, ensuring timely procurement of raw materials, and maintaining smooth operations. 

Supply chain financing emerges as a vital tool for businesses looking to navigate these challenges successfully. By leveraging various financing solutions, companies can enhance their operational efficiency and secure their position in a competitive market.

What is Supply Chain Financing?

Supply chain financing (SCF) is a financial solution that optimizes cash flow within the supply chain by facilitating better liquidity for businesses. Let us break down this rather complex definition into a simpler explanation. Supply Chain Financing involves various stakeholders, including suppliers, buyers, and financial institutions. 

• Suppliers: Provide goods or services to businesses and rely on timely payments for their operations.
• Buyers: Companies purchasing goods or services, who may need more time to pay their suppliers due to cash flow constraints.
• Financial Institutions: Banks or financing companies that provide funding to suppliers or buyers, enabling faster transactions and smoother cash flow.

Here’ how it typically works:

• When a buyer orders goods from a supplier, they may not be able to pay immediately. Instead, they can involve a financial institution that pays the supplier upfront, allowing them to receive their payment quickly.
• The buyer then pays back the financial institution at a later date with a certain rate of interest, which is often more convenient for them.

Benefits:

• Improved Liquidity: Suppliers receive immediate payment, enhancing their cash flow and allowing them to reinvest in their business.
• Extended Payment Terms for Buyers: Buyers can manage their cash flow more effectively by extending payment terms without harming supplier relationships.
• Risk Mitigation: Financial institutions assess the creditworthiness of buyers, reducing the risk for suppliers.

Let’s take a real-world example to make things clearer. A well-known example of supply chain financing in action is a major retail chain that partners with local manufacturers. 

The retail chain has a steady demand for goods but struggles with cash flow during peak seasons. 

• By using supply chain financing, the retail chain can place large orders with manufacturers who receive immediate payment from a financing company.
• This allows the manufacturer to ramp up production and meet the retail chain's needs without financial strain.
• The retail chain, in turn, can pay back the financing company after sales peak, ensuring smooth operations throughout the festive season.

How Supply Chain Financing Can Enhance Your Festive Season Operations

Here are 4 detailed ways supply chain financing can help your business thrive during the festive rush:

1. Sales Invoice Discounting

Sales invoice discounting involves a business selling its outstanding invoices (sales invoices) to a financing institution to receive immediate cash. This helps the business maintain liquidity without waiting for customers to pay.

Stakeholders:

• The Supplier: A garment manufacturer who has supplied products to a retail store and issued an invoice.
• The Retailer (Buyer): The retail store that has received the goods and will pay the supplier within the agreed terms (e.g., 30 days).
• The Financing Company: The institution that provides the advance payment against the sales invoice.

Let’s see an example to understand this better:

A garment manufacturer issues a sales invoice worth ₹6 lakh to a retailer. Instead of waiting for the retailer to pay, the manufacturer approaches a financing company to discount the invoice. The financing company agrees to pay ₹5.85 lakh upfront, charging a discount fee of 2.5% of the invoice value.

The discount rate varies depending on the buyer’s creditworthiness and the terms agreed upon.

‍How It’s Used: 

The garment manufacturer receives immediate cash to reinvest in raw materials for new production. After 30 days, when the retailer pays the invoice amount of ₹6 lakh to the financing company, the financing company retains the ₹15,000 discount as their fee. This enables the manufacturer to maintain cash flow and continue operations without disruptions.

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.

Stakeholders:

• The Buyer: A retailer who has received goods from a supplier and accepted a purchase invoice.
• The Supplier: The manufacturer or wholesaler providing the goods to the retailer.
• The Financing Company: The institution that finances the purchase invoice.

Example:

A retailer receives an invoice worth ₹8 lakh from a supplier for bulk festive stock, with payment terms of 45 days. The retailer approaches a financing company to discount the purchase invoice, which allows them to pay the supplier immediately. The financing company agrees to pay ₹7.76 lakh upfront, charging a discount fee of 3% of the invoice amount.

Similar to sales invoice discounting, the discount rate varies based on the retailer's financial health and the supplier’s reputation.

How It’s Used:

With the cash obtained from the financing company, the retailer can settle the invoice with the supplier immediately, ensuring timely delivery of stock for the festive season. Once the retailer's sales start coming in, they can repay the financing company after 45 days when the payment for the invoice is due, allowing for smoother cash flow management.

3. Working Capital Loans: Financing Seasonal Growth

Working capital loans provide businesses with necessary funds to cover operational expenses during peak periods. These loans are particularly useful for businesses experiencing increased costs associated with seasonal demand.

Stakeholders:

• The Borrower: A small bakery planning to expand its offerings for Diwali.
• The Bank or Financing Institution: The lender providing the working capital loan.

Let’s say a bakery anticipates a surge in demand for festive treats and needs to hire additional staff and purchase bulk ingredients. The owner approaches a bank for a working capital loan of ₹2 lakh to cover these expenses. The bank agrees to provide the loan at an interest rate of 18% per annum with a repayment period of six months.

With the loan, the bakery can purchase flour, sugar, and decorations in advance. The increased production capacity enables them to meet customer demand during the festive season. Once the orders start rolling in, the bakery can repay the loan from the profits generated by sales.

4. Supply Chain Finance Platforms: Streamlining Operations

Utilizing a supply chain finance platform like BizongoFin can provide businesses with greater visibility and control over their cash flow and procurement processes. These platforms facilitate communication between buyers, suppliers, and financial institutions, making transactions more efficient.

For instance, any company can leverage a supply chain finance platform to track outstanding invoices, payment timelines, and cash flow projections. 

• This transparency enables the company to make informed decisions about inventory purchases and financing options. 
• When preparing for the festive season, the company can analyze data to determine when to utilize invoice discounting or secure working capital loans to ensure they can meet customer demands without delay.

Key Takeaways

• Utilize invoice discounting to unlock immediate cash flow, allowing for faster reinvestment in business operations.
• Consider working capital loans to cover seasonal expenses and maximize growth opportunities.
• Leverage supply chain finance platforms like BizongoFin for improved visibility and control over cash flow and procurement processes.

How to position your business for success?

As the festive season approaches, leveraging supply chain financing can provide your business with the flexibility, liquidity, and strategic advantage needed to navigate increased demand. By understanding how to use tools like invoice discounting, working capital loans, and supply chain finance platforms, you can enhance your operational efficiency and strengthen supplier relationships.

Ready to Transform Your Festive Season Operations?

At Bizongo, we specialize in providing tailored supply chain financing solutions that can help your business thrive during the festive rush through partnerships with 30+ NBFCs and Banks. 

Explore our financing options today, get connected with our 👉 BizongoFin Experts today 👈