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Tata Capital > Blog > Dealer Finance > Supply Chain Financing: Opening Doors for MSMEs to Access Formal Credit

Dealer Finance

Supply Chain Financing: Opening Doors for MSMEs to Access Formal Credit

Supply Chain Financing: Opening Doors for MSMEs to Access Formal Credit

World Bank data reveals that MSMEs are the largest employers in developing countries despite having the least financial and regulatory support. If MSME’s are facilitated with formal access to credit on time, it will have a ripple effect in boosting job creation, rising income levels, reducing vulnerability, and accelerating growth. 

In India, MSMEs account for a significant share of employment and GDP contribution. However, due to their informal nature, MSMEs lack access to formal credit. Lenders face challenges in credit risk assessment owing to the lack of availability of structured financial information, historical cash flow position, repayment trends data, etc.

Supply chain financing (SCF) is a form of lending where MSME sellers can receive early payment against their invoices to large buyers. As the lenders advance funds based on the buyer’s financial standing and net worth, suppliers receive SCF at a lower cost when compared to borrowing on their standalone balance sheets. By optimising both the buyers and sellers working capital position, SCF deepens supply chain relationships and enhances trust and goodwill among the partners. 

What is a supply chain loan? Definition & SCF full form explained

A supply chain loan is a financing solution that helps businesses manage working capital by funding suppliers based on approved invoices from buyers. The SCF loan full form is Supply Chain Finance. A supply chain finance loan improves cash flow, reduces payment delays, and strengthens buyer–supplier relationships. With an SCF multi lender model, multiple financiers participate, offering competitive rates and faster disbursals to vendors and distributors across the supply chain.

How supply chain loan works (SCF loan mechanism)

It is standard practice for the buyer to negotiate payment terms with the seller for any underlying trade transaction. 

For example, a buyer might trade on 60 days credit. The buyer gains 60 days from the delivery of the goods to settle the invoices. In the meanwhile, the seller requires immediate financing for working capital to maintain stocks and pay salaries. 

A third-party financial intermediary like Tata Capital partners with the corporate buyer to advance early payments to its suppliers. Upon confirmation of invoices from the buyer, payments are made to the seller after deducting a nominal rate of interest determined basis the total amount and days financed. The longer the funded days, the higher the fees. On the due date, the payments are collected from the buyer and dues are settled. 

With Tata Capital’s tailormade SCF programs, sellers and buyers can improve liquidity and obtain relief from the constant stress of inadequate cash flows.

Also, read – Msme Sector: List of Eligible Businesses

Key features of Supply Chain Finance loans

Supply Chain Finance loans come with several practical advantages that make them attractive for growing businesses, especially those managing complex buyer-supplier networks:

  • Enables quick working capital access through invoice-based supply chain loan financing
  • SCF loan full form is Supply Chain Finance, supporting buyers and suppliers simultaneously
  • Offers competitive interest rates under a structured supply chain finance loan model
  • Repayment is aligned with invoice payment cycles, improving cash flow planning
  • Reduces need for traditional collateral by leveraging buyer creditworthiness
  • Strengthens long-term buyer–supplier relationships and operational stability
  • Uses an SCF multi lender approach, allowing multiple financiers for better limits, pricing, and faster disbursals

Also, read – Top Government Schemes for Startups and MSMEs in India (2026)

Benefits of supply chain loan for MSMEs

  • Working Capital Optimisation: SCF helps optimise working capital for both buyers and sellers. With SCF, suppliers can receive payment for their invoices earlier, reducing their day sales outstanding and increasing the availability of cash to invest in their future. 
  • Lower cost of financing: Since lenders consider the buyer’s creditworthiness, vintage of association, and supply chain relationship before sanctioning such funding, the cost of funding is more competitive than traditional sources of financing. This makes SCF an attractive way of obtaining finances for MSME sellers.
  • Improved Supply Chain Relations: Several small businesses suffer in their growth stages due to a lack of timely access to capital. SCF provides such access to funds and stabilises operations of growing concerns, thereby strengthening buyer-seller trade relationships.

Also, read – Get MSME Loan Without Collateral in 5 Ways

How SCF multi lender model empowers MSMEs access to credit

Despite the vital role MSMEs play in contributing to the growth and development of emerging economies like India, they remain largely underserved by formal banking channels. Over 80% of MSMEs in India fall outside the purview of traditional bank credit and access financing from private or informal sources at much higher costs. 

Several challenges limit lenders from extending financing to smaller businesses: 

  1. Lack of standardised financial reporting 
  1. Lack of visibility on business performance data
  1. Difficulty in measuring risk accurately 
  1. Higher risk of default
  1. Limited bandwidth and resources with financiers to underwrite and onboard customers

SCF helps lenders overcome these barriers and extend financing to MSMEs for many reasons –

  1. SCF extends financing basis the underlying trade relationship between MSME sellers and large corporate buyers. Lenders do not have to assume high risk as reputed, and well-known large corporate buyers make the settlements.
  1. Given how SCF transactions are structured, lenders can onboard more partners as the documentation and underwriting process is simplified and less tedious.
  1. With the advent of technology, onboarding to disbursement and settlement can be streamlined, making it easier to advance finances to small businesses without being resource-intensive or impacting the bottom line. 

Previously, SCF was limited to larger corporations due to high onboarding costs and transacting costs. But now, with the pandemic and technological advancement, SCF is increasingly being seen as a panacea for MSMEs and lenders alike in bringing down the cost of operations. Digitisation of SCF processes like invoice acceptance, billing, e-payments has drastically brought down the cost of SCF, making it viable even for small transaction values.

MSMEs account for over 90% of commercial enterprises in India, comprising 63 million MSMEs across diverse geographic locations. The financing of MSMEs has been identified as a chief priority amongst India’s economic goals.

Also, read – What Is the Market Development Assistance Scheme for MSMEs?

Supply chain loan examples

A supply chain loan is also widely used in the pharmaceutical sector. When hospitals or large pharma distributors approve invoices, smaller drug manufacturers and packaging vendors can receive early payments. SCF helps these suppliers manage raw material purchases and production cycles without cash flow stress. 

In healthcare logistics, a supply chain finance loan supports cold-chain operators and transporters by funding confirmed delivery bills. Through an SCF multi lender framework, multiple lenders finance approved invoices, offering faster access to funds, competitive rates, and uninterrupted supply continuity.

In the automotive sector, a supply chain loan funds OEM-approved invoices with multi lender support.

Eligibility & how to apply for a Supply chain loan (SCF Loan)

Understanding who can apply and how the process works makes it easier for businesses to access structured working capital. Below is a clear overview of eligibility and application steps for SCF loans:

  • Businesses eligible for a supply chain loan include manufacturers, distributors, MSMEs, and service providers associated with large, creditworthy buyers
  • Eligibility is primarily based on buyer approval, invoice authenticity, and past transaction history
  • To apply for a supply chain finance loan, suppliers must be onboarded on the buyer’s SCF platform and complete basic KYC formalities
  • Approved invoices are submitted digitally for financing consideration
  • Funding limits and interest rates are determined by buyer strength and turnover
  • Once approved, funds are disbursed quickly, and repayment occurs when the buyer settles the invoice

Also, read – NIC Code for MSME:Guide on National Industrial Classification

Traditional financing vs. Supply chain loans: A comparison

To better understand how SCF stands apart from conventional borrowing, the table below compares traditional financing with modern Supply Chain Finance solutions:

AspectTraditional financingSupply chain loans
Basis of fundingBorrower’s credit score and collateralBuyer-approved invoices via supply chain loan
Loan structureTerm loans or overdraftsInvoice-based supply chain finance loan
Interest ratesGenerally higher for MSMEsLower, based on buyer creditworthiness
Disbursal speedSlower, document-heavyFaster, digital processing
Lender setupUsually single lenderSCF multi lender model with multiple financiers
Cash flow impactFixed EMIsRepayment aligned with invoice settlement

This comparison shows why SCF is often more flexible and cash-flow friendly for supply-driven businesses.

Top benefits of SCF multi lender platforms

SCF multi lender platforms are designed to improve funding efficiency and reduce financing risks for businesses across the supply ecosystem. Key benefits include:

  • Enables faster access to a supply chain loan through multiple funding sources
  • Supports smoother cash flow for suppliers
  • Offers competitive interest rates due to lender participation
  • Reduces dependency on a single financier while ensuring consistent funding availability

Also, read – Udyam Certificate Registration: Benefits, Eligibility & Documents

Risks and challenges in supply chain loans

While supply chain loans offer numerous benefits, businesses must be aware of potential risks and challenges:

  • Default by buyers can impact repayment of a supply chain finance loan
  • Over-reliance on a single buyer may increase financial risk
  • Operational delays or invoice discrepancies can affect funding
  • Managing multiple lenders in an SCF multi lender setup may complicate coordination
  • Compliance and KYC requirements must be strictly maintained 

SCF offers multiple benefits to the MSMEs and equips them with resilience to navigate working capital deficits and stabilise operations. With SCF, MSMEs can expand and grow. By partnering with a financial institution like Tata Capital for SCF, MSMEs can yield maximum returns. Reach out to Team Tata Capital to know more about how you can bridge your working capital gap using our diverse range of supply chain finance solutions. 

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FAQs

What is a supply chain loan and how does it work?

A supply chain loan provides early payment to suppliers via a supply chain finance loan using an scf multi lender model.

What is SCF loan full form and what does it mean?

 

The SCF loan full form is Supply Chain Finance, enabling a supply chain loan or supply chain finance loan via SCF multi lender funding.

How does a multi-lender supply chain finance (SCF) platform operate?

 

An SCF multi lender platform funds a supply chain loan or supply chain finance loan, where multiple financiers collaborate under the SCF loan full form model.

Who is eligible for a supply chain finance loan in India?

 

Businesses linked to large buyers can access a supply chain  or supply chain finance loan, including scf multi lender setups.

What are the benefits of supply chain loans for MSMEs?

 

Supply chain or supply chain finance loans help MSMEs improve cash flow, reduce delays, and leverage SCF multi lender options.

How do supply chain finance loans differ from traditional business loans?

 

Supply Chain Finance loans (scf loan full form) use buyer-approved invoices, unlike traditional loans, with SCF multi lender.

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