Why Supply chain finance (SCF) Is Beneficial For Small And Medium-sized Enterprises ?

Supply chain finance (SCF) refers to a set of financial solutions that optimize the cash flow of businesses involved in a supply chain. In a typical supply chain, there are various parties involved, such as manufacturers, suppliers, logistics providers, and customers. Supply chain finance aims to provide these parties with access to credit and better working capital management to improve their financial position. It is a way for companies to optimize their cash flow and access working capital by borrowing against outstanding invoices as opposed to waiting for payments.

SCF involves using financial instruments such as factoring, invoice discounting, and dynamic discounting to improve cash flow and reduce the risk of disruptions in the supply chain. For example, a supplier can sell their outstanding invoices to a third-party financier at a discount, which provides the supplier with immediate cash flow while reducing the customer’s risk of financial distress. SCF is beneficial for small and medium-sized enterprises (SMEs) that may have limited access to credit and financing options. By leveraging the financial strength of their larger counterparts in the supply chain, SMEs can improve their financial position and lower their cost of capital.

Overall, supply chain finance improves the efficiency and resilience of the supply chain by freeing up cash flow and reducing risk. It allows businesses to operate more smoothly and reduces the likelihood of disruptions due to financial constraints.

Here’s an example of how supply chain finance works:

Company A is a supplier that has delivered goods to Company B, a buyer, and has issued an invoice to be paid in 60 days. However, Company A is in urgent need of cash to pay for its own business needs, so it decides to use invoice financing, a type of supply chain finance.

Company A contacts a financing institution and submits the invoice to them. The financing institution reviews the invoice, approves it, and then pays Company A a portion of the invoice amount upfront, typically 70-85% of the invoice value, minus a discount fee. The remaining balance, minus any additional fees, is paid to Company A once the invoice is paid in full by Company B.

Through supply chain finance, Company A can effectively access the financing they need to continue their operations without disrupting the buyer-supplier relationship with Company B. This technique also ensures that Company B is able to stretch out its payment cycle while Company A gets to receive cash quickly to meet its working capital needs.