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Supply chain finance is emerging as a critical component of financial supply chain management in India. With the push towards optimising working capital and cash flows, companies are adopting supply chain finance solutions to extend payment terms to their suppliers while providing easier access to financing. This article explains what supply chain finance means, its benefits for buyers and suppliers, the concept of supplier financing, and how supply chain finance solutions are evolving in India.
What is supply chain finance?
Supply chain finance refers to a set of financial solutions that optimise cash flow by allowing businesses to extend supplier payment terms while providing suppliers access to financing. It involves managing cash flow across the entire supply chain by financing inventory and accounts receivable.
Supply chain finance improves working capital, cash flow, and financial flexibility for both buyers and suppliers. It goes beyond traditional trade financing offered by banks to facilitate financing through buyers, suppliers, and external finance providers.
Supply chain finance meaning can be simplified by understanding its core. At its core, supply chain finance leverages the financial strength and credit rating of the buyer to allow suppliers access to low-cost financing options. While the buyer extends payment terms, the supplier gets paid early by a financing institution at a discount. The low credit risk makes it attractive for banks. This ensures that suppliers have adequate working capital to fulfil orders and continue production. The buyer also optimises working capital by extending payable days.
Financial supply chain management
Financial supply chain management involves the management of financial flows between parties in a supply chain. It optimises financial processes through automated solutions that connect purchasing, finance, and suppliers.
Key benefits of supply chain finance include extending payment terms to suppliers while still getting rebates for early payment, lower working capital needs by improving cash-to-cash cycle time and reducing procurement costs through dynamic discounting for buyers.
Supplier financing
Supplier financing is a major component of supply chain finance solutions. It helps optimise working capital for both buyers and suppliers. Buyer-led supplier financing programs are offered by large corporates to their suppliers, especially Small and Medium-Sized Enterprises (SMEs). Under this, banks provide financing to suppliers at better terms by leveraging the buyer's credit rating.
Benefits for suppliers include access to funds at lower interest rates, no need for collateral, and improved cash flow cycles. Buyers can extend payment terms, suppliers stay financially healthy, and there is stability in the supply chain. Banks also benefit by lending to less risky transactions backed by high-rated buyers.
Supply chain finance in India
Supply chain financing is gaining traction in India as companies aim to optimise working capital and cash flows. Buyers are collaborating with banks to offer financing to their suppliers and distributors. Sectors like auto, retail, and agri-business are adopting supply chain finance solutions. Government initiatives like TReDS are also supporting online marketplaces for bill discounting. However, SMEs need more awareness regarding such financing options.
Key benefits in India for SME suppliers include access to easier and cheaper funds, no collateral requirement, better cash flows and financial health. For corporate buyers, it allows optimisation of working capital requirements, supports supplier ecosystem, and extension of payables period.
Conclusion
As supply chains grow complex, supply chain finance is critical for efficient financial operations. With the rise of digitisation, innovative solutions can transform buyer-supplier transactions in India. Manage your small business' finances better with the FIRST STEP Business Loan from IDFC FIRST Bank. Get customised credit up to Rs 1 Crore and grow your enterprise.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.