Supply Chain Finance: A Win-Win For Buyers and Suppliers

Supply chain finance (Supply Chain Finance) is essential to supply chain management. It connects buyers & suppliers with a financing institution to lower financing costs, improve cash flow efficiency, and reduce risks.

They say, "Cash is king," and this holds especially true in the business realm. The notion that cash flow is the lifeblood keeping businesses thriving is widespread. However, many times, MSMEs (Micro, Small, and Medium Enterprises) find themselves lacking the necessary. Although options like MSME business loans exist for MSME financing, traditional banks have not been particularly friendly toward MSMEs in regard to fulfilling Working Capital needs. In such scenarios, Supply Chain Finance is known to be a reliable solution, creating a win-win situation for both parties—buyers and suppliers.

But how does this happen? Buyers and suppliers have starkly contrasting interests, so how does Supply Chain Finance create a bridge between these interests to the extent that both parties win? This blog aims to answer this very question.

What is Supply Chain Finance?

Supply Chain Finance, also known as reverse factoring or supplier financing, comprises technology-driven solutions crafted to improve working capital management for buyers and sellers engaged in global trade. Fundamentally, Supply Chain Finance simplifies invoice approval and settlement processes, automating the entire journey from initiation to completion. Buyers, in collaboration with financial institutions, approve their suppliers' invoices for financing, establishing a mechanism that optimizes working capital and provides liquidity to both ends of the transaction.

Supply Chain Finance: Where Both the Parties Wins‍

In business transactions, buyers and suppliers often clash in their interests. Buyers aim to extend payment terms, holding onto their cash for as long as possible, while suppliers desire quick payments to manage their working capital needs and stimulate growth. This financial tug-of-war is where Supply Chain Finance (Supply Chain Finance) emerges as a game-changer, orchestrating a harmonious balance between these seemingly conflicting interests.

Benefiting Buyers with Supply Chain Finance

For buyers, Supply Chain Finance offers a better way for working capital management and strengthens relationships with suppliers.

The process involves a buyer issuing a purchase order to a supplier, followed by the delivery of goods and the generation of an invoice. In an Supply Chain Finance arrangement, approved invoices are sent to a finance company for processing.

The supplier can choose discounted payment, facilitated by the finance company. The buyer then makes the payment to the finance company on the agreed-upon maturity date.

Advantages for Buyers:

• Extended Payment Terms: Supply Chain Finance enables buyers to negotiate extended payment schedules with suppliers. This flexibility is crucial for optimizing cash flow, reducing borrowing needs, and improving working capital management.
  

• Improved Working Capital Management and Forecasting: Through Supply Chain Finance, buyers can achieve better visibility into their working capital needs, promoting more accurate forecasting and management.
  

• Enhanced Supplier Relationships: Timely payments facilitated by Supply Chain Finance contribute to healthier buyer-supplier relations , as suppliers receive their dues promptly, mitigating the risk of disruptions.

Empowering Suppliers through Supply Chain Finance

While buyers reap the benefits of extended payment terms, suppliers find solace in faster access to much-needed liquidity. Supply Chain Finance provides a mechanism for suppliers to receive expedited payments against approved invoices, often at a lower cost compared to individual financing endeavors.

Advantages for Suppliers:

• Cash Flow Management: Supply chain finance gives suppliers more control over their cash flow by allowing them to schedule payments according to their needs. This flexibility helps in better managing finances and making informed decisions.
  
  
• Accelerated Payments for Growth: Suppliers can receive payments faster through supply chain finance, enabling them to invest promptly in business growth. This streamlined process contributes to improved operational efficiency and better working capital management.
  
  
• Lower Interest Rates: Suppliers in supply chain finance benefit from lower interest rates facilitated by larger buyers with better credit ratings. This collaborative financing model provides cost savings, especially for smaller suppliers who may not qualify for such rates independently.
  
  
• Preserving Working Capital: Suppliers don't need to use their own working capital during the financing process as supply chain finance is set up and financed by buyers. This approach provides financial flexibility and reduces the strain on suppliers' internal funds.

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Let’s understand this with an example: 

In the current market, buyers often negotiate payment terms ranging from 30 to 120 days after goods are delivered. This extended period between delivery and payment settlement can create cash flow challenges for suppliers, impacting their ability to cover operational costs promptly and hampers efficient working capital management.

To address this challenge, suppliers have the option to apply for supply chain finance (Supply Chain Finance). In the example given, this means that suppliers facing delayed payments can use Supply Chain Finance to receive immediate cash, bridging the payment gap and providing liquidity to sustain their operations.

Here's a simplified breakdown:

Negotiated Payment Terms:

Buyers and suppliers agree on payment terms during negotiations, specifying the number of days for payment after goods delivery.

Extended Payment Period:

Buyers may choose extended payment periods, offering benefits for their cash flow but creating challenges for suppliers needing immediate funds.

Cash Flow Gap for Suppliers:

Suppliers, especially smaller businesses, may struggle to cover expenses during the extended payment period, affecting their daily operations.

Supply Chain Finance Application by Suppliers:

Suppliers can apply for Supply Chain Finance through a financial institution or platform, like Bizongo. They request financing based on outstanding invoices.

Immediate Cash Support:

Upon approval, suppliers receive immediate cash, addressing the cash flow gap and helping them meet financial obligations promptly.

Win-Win Situation:

Supply chain finance benefits both parties. Buyers maintain extended payment terms, optimizing their cash flow, while suppliers receive timely payments through financing, ensuring financial stability.

Supply chain finance provides a practical solution for suppliers facing delayed payments, helping them maintain financial stability and allowing a balanced relationship between buyers and suppliers in the business ecosystem.

How to Apply For Supply Chain Finance?

‍Buyers and suppliers seeking Supply Chain financing can easily access it through platforms like Bizongo. On these platforms, financial institutions are readily available to fund their business transactions, providing a convenient and streamlined way to secure the necessary financial support for their operations.