All You Need to Know about Supply Chain Finance for Efficient Invoice Management
Most small and medium enterprises (SME) in India that supply material to large manufacturing industries use invoices as financial instruments and often face delays in receiving payment. Most of their customers ask for a 90-day credit period and this causes a short-term cash crunch within the SME and affects their business. For instance, they are unable to pay their suppliers and labour on time, leading to operational inefficiency and the inability to expand their business. Now, these very invoices or receivables can save the day for such SMEs. Supply Chain Finance allows them to raise the necessary funds against these receivables as opposed to selling them at a substantial discount through invoice discounting.
Why SMEs Need Supply Chain Finance
In India, smaller businesses have to offer a credit period of around 90 days after executing an order and raising invoices to their customers, predominantly large manufacturing companies. Such generosity helps them establish a better working relationship and build customer loyalty, thus resulting in recurring orders. But there’s a flip side. While SMEs need to deal with delayed payments from their clients, they do not have the wherewithal to delay payments to their suppliers. Besides, they need funds for overhead expenses and salaries. This creates a short-term financial crunch and is precisely the challenge that Supply Chain Finance is meant to solve. The invoices raised to large companies or accounts receivables from them can be used by SMEs to raise funds and overcome cash flow challenges.
With most companies going global, their supply chains must overcome financial challenges and ensure that their products and services reach the end customers in time. There are multiple stakeholders involved in the supply chain from internal to external constituents and they result in additional pressure on funds. Any disruption of funds disrupts production and that results in delivery delays to customers. Therefore, any kind of short-term financial constraint could have a long-term negative impact on a company’s financial health.
Internally, a company’s supply chain faces pressure from product development, planning, marketing and sales, procurement and distribution teams to create innovative products and services that are tailored to customers’ needs; they also need to be scalable enough to drive profit margins. On the external front, a company faces pressure from both the supply and demand sides. For instance, there could be pressure related to forecasting demand, carrying costs during delays, product testing and quality control, and social responsibility in the form of green initiatives. The demand-side pressures include fluctuations during seasons, cyclical nature of products and cost-consciousness amongst customers. To alleviate such pressures, companies need to take a closer look at the way they finance their supply chains whether it’s with personal funds, bill discounting or more. Supply Chain Finance is a good way of obtaining a competitive advantage over rivals.
Applying for Supply Chain Finance
Supply Chain Finance helps you instantly liquidate your invoices into cash and is actually an easy way to put more money into your business by collateralising your outstanding invoices or bills, as compared to selling them or invoice discounting. A business can opt for a loan tenure that typically varies between 30 and 180 days, depending on the nature of its business and customer payment history. Some FinTech companies allow you to make a one-time bullet payment instead of monthly instalments and avoid paying any further interest. A great benefit of the technology platform used by new-age FinTech lenders is that you can apply for Supply Chain Finance against your invoice from anywhere and anytime you want.
You need not step out of your office and can instead fill the simple application form through their website or even a mobile app. Also, you need not pledge any personal or business assets as collateral. The invoices that you provide serve as the basis for loan disbursal, which usually gets completed in 3 working days.
In order to obtain Supply Chain Finance, your business must have a minimum operational history of around 2 years and the customer minimum vintage should be over 3 months. The minimum annual turnover should also be over Rs 1 crore. While applying, you need to keep the following documents in hand: Audited financial reports of the last two years, VAT returns and bank documents of the last 6 months, KYC documents of the applicant and the organisation, invoices of the last 3 months, and sales ledger of the last 6 months.
Supply Chain Finance Vs Invoice Discounting
There are typically two ways in which businesses can use their invoices to raise funds—invoice discounting and Supply Chain Finance. With invoice discounting, also called bill discounting, a business sells its outstanding invoices to a third party at a substantial discount and raises much-needed funds for its short-term needs. Most businesses would not prefer invoice discounting as it allows a third party to peek into their customers and contact them to recover an invoice. This can have repercussions on the long-term relationship between the business and its customers. Supply Chain Finance is a much better option than bill discounting as it allows outstanding invoices to be used as collateral to secure a loan.
Supply Chain Finance is also a much more convenient process as compared to invoice discounting. If you apply for finance through a FinTech lender, you do not need to visit a financial institution and stand in queues. An SME can receive as low as Rs 1 lakh to as high as Rs 1 crore to be used as working capital or to fund the growth of a business. As much as 90% of the value of the outstanding invoices can be borrowed.
The current economic practices being followed by the industry are loaded in favour of larger organisations that can delay payments to smaller businesses at will. With a rapid increase in finance options—other than invoice discounting —for small firms in the supply-chain and with more FinTech lenders acting as intermediaries, there will be more pressure on large firms to regulate their payment cycles. Ultimately, as the system becomes more mature, even large firms will benefit in the longer run and change their practices to make life easier for their suppliers.