Supply chain finance is one of the areas where financial organisations have focused their resources for some time now. The reason being that there is a double benefit for financial organisations in supply chain financing.
However, before we delve any further it is imperative that we first get to know what is supply chain financing.
What is supply chain finance?
Supply chain finance is creating a connection between the buyer, the seller and the financier. This leads to a healthy collaboration benefiting everybody. The major advantage of supply chain financing is that transactions are done in utmost transparency.
Supply chain financing is an advantageous model for both the buyer and the supplier. Let us look at how supply chain finance benefits both the buyers and the suppliers.
The advantage to the buyer
The biggest advantage that a buyer gets is that their credit periods get extended. This also has a positive effect on the Days Payable Outstanding or DPO. This makes their transactions economically fruitful.
It has also been observed that due to supply chain financing, there has been a positive increase in the productivity ratio. This is because of the ease that has been provided vis-a-vis the extension of the credit period.
Hence, through supply chain financing, the buyer can secure their supply chain, provide a boost to the working capital, raise the liquidity values and start a positive flow of cash. All this improves their credit ratings.
The advantage for the supplier
The presence of adequate working capital is essential for the growth of the supplier. This fuels their plans and also their ability to innovate. Through supply chain financing, ERPs integrates their ideas seamlessly to provide them with real-time financial analysis.
Suppliers are then able to curtail their pending bills and engage in more cost-cutting exercises and provide greater flexibility in the entire financial decision-making process. There is also a benefit that can be derived through the financing rates. This has a direct bearing on the profits and increase in overall financial efficacy.
Creation of long term advantage
It needs to be understood that supply chain financing is not just another business scheme but a long term relationship between the buyer, the seller and the financier. This triangular network is a win-win for all the parties. The bonhomie and camaraderie that is created through this exercise will have a direct bearing on the entire business ecosystem.
It is an extremely secure and hassle-free process and all the transactions are smooth and without obstacles. A latent benefit that appears from this is that this benefit has a gradual trickledown effect. Once the suppliers and the buyers get benefitted from it, the consumers too will experience the same. This has a positive effect on the entire financial environment.
There are times when an applicant in dire need of a loan is unable to find one despite being able to fulfil most of the criteria, barring one, which states that there would be a business loan against collateral. In supply chain financing, there is a provision for a loan without collateral. It is also one of the reasons why supply chain financing is sought after by most.
Lastly, supply chain financing does provide a tremendous boost to the overall economy, consisting of a buyer, a supplier and the financier. Supply chain finance is more than just a business scheme. It also covers the long-term relationship that is built with trust and the relation between the buyer and the supplier.
It creates a positive environment that is conducive to improved productivity. It also provides a boost to both the supplier and the supplier through extended repayment and payment options. Supply chain financing is a great financial tool that needs to be used more often than not.