Micro, Small and Medium Enterprises (MSMEs) often lack the collateral to get adequate finance from financial institutions. It impacts their growth and expansion, making it difficult to sustain their operations and production. MSMEs may have found the perfect product-market fit but are restricted from capitalising on the opportunity without access to timely funds. This is where supply chain financing can save the day for many small businesses by getting them access to instant finance and liquidity.

Supply chain financing is gaining more attention in the market for it helps facilitate trust and mutual growth — a dire need in the post-pandemic world. Globally, businesses were hit aplenty in the last two years, and the disruptions in supply chains are still recovering from the impact. As they work towards restoring operations to meet rising demand, supply chain financing solutions can help the transition. 

Supply chain financing involves an influx of cash leveraging the buyer-seller trade exchange. While sellers get early payments, buyers get some room to optimise working capital. The higher their credit limit, the easier it is for the seller to access on-demand finance. It helps them source capital from trusted financiers such as Tata Capital at a lower cost as lenders consider the supply chain relationship along with the standalone financial statements of the seller.

Leveraging it best

It benefits the sellers significantly for Invoice Discounting solutions help them streamline cash flow and get early payments on outstanding invoices. The seller can benefit from early payments to optimise processes and keep operations running smoothly. They can maintain relationships with buyers and give them sufficient time to pay without overextending themselves. 

For buyers, it’s a means to allocate their working capital without causing a strain on the cashflow. The buyers can use the freed-up working capital to innovate and expand operations. 

Supply chain financing increases transparency in the payment processes, making it easier for the buyers and sellers to safeguard themselves against financial uncertainties. It helps fill the credit gap and strengthens supply chain relationships. Both can invest in technology and analytics, making the most of data and resources.

Solutions by Tata Capital even help MSMEs manage late payments and keep up with seasonal demands. Such solutions are meant to safeguard small organisations during turbulent financial times. 

A look at the workings

Let’s assume XYZ is a small business that has made enough sales with a large corporate and acquired an even larger order to expand their business. Their credit terms with the customer are 90 days.

To complete this order, XYZ needs to buy raw materials from ABC. However, XYZ does not have enough funds to make this purchase as payments for previous goods invoiced are still pending. Additionally, ABC has shorter payment terms, which XYZ may not be able to accommodate through its working capital alone.

Here, XYZ can opt for Supply chain financing. XYZ can access the capital needed to pay ABC for supplies to fulfil the larger order by discounting its earlier invoices with the lender and accessing early payments. It can help XYZ acquire necessary supplies without finances being a hurdle for ABC to do business with them. Customers directly pay the lender on the due date and settle the account. 

advantages of supply chain finance

Collaboration Is Key

Supply chain financing works best when the buyer and the seller have been in business together for a long time. Since it is beneficial for getting more time to pay off the debt and keep the money flowing, both parties are willing to collaborate and work together. It fosters goodwill and resilience that benefit the overall supply chain. 

An efficient financing alternative, supply chain financing reduces an MSME’s dependence on informal funding sources. Technological advancements are easing the financing processes further as it’s now a more streamlined end-to-end approach. Each party has access to bank statements, GST and e-invoices in real-time. Such transparency helps facilitate the collaboration required for such a tie-up.

Whether it is invoice discounting, channel finance or purchase order funding — businesses can choose from diverse working capital offerings that work best for them, with advice from a trusted partner like Tata Capital. We offer several supply chain financing solutions to MSMEs and corporates, tailoring them to meet industry-specific needs. Click here to know more about these offerings and get started on your supply chain financing journey.

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