Growth is essential for the survival of any business in the long run. It fuels asset acquisition, enables easier funding for investments, and attracts new talent to your enterprise. Growth is also the primary force which drives performance and profit. Sustained business growth entails a sustained growth of the economy, and thereby of the entire country.
For the businesses to speed up their growth rate, a steady influx of capital is necessary. One of the ways to ensure a secure stream of working capital is to opt for supply chain financing. Supply chain finance is a premiere financing tool which optimizes and accelerates cash flows by extending short-term finance to dealers and suppliers, which are integral components of the supply chain of large-scale companies.
Where is supply chain financing useful?
Let’s illustrate the use cases of supply chain financing with the help of an example. Let’s consider a distributor that is a part of a large-scale company’s supply chain. Now, buying the company’s product in bulk can provide the distributor with huge discounts on their purchase, which itself can govern the profit margins. But where to get the exorbitant amount of money to purchase in the first place. That’s where supply chain or working capital finance comes into the picture.
Alternatively, suppose the large-scale company changes its payment terms from 20 days to 60 days. In such cases, the change of terms can directly affect the distributor’s cash flow in the supply chain, since slower payments could render them incapable of making subsequent purchases. In such circumstances, the large company could opt for a reverse factoring plan, which is a subset of supply chain financing, to provide the distributors with enough capital to make frequent purchases.
To acquire capital from supply chain financing, the buyer needs to approve their supplier’s invoices by a lender.
Additional Read: Planning to avail a working capital loan? It just may be the best thing for your business
Advantages of supply chain financing
To provide funds to the supply chain, a considerable sum of cash is necessary, which is usually shelled out using loans. But loans require upfront collateral and may charge higher interests rate, constricting your cash flows even further. But such is not the case with supply chain financing. Here are some advantages of working capital financing.
- Supply chain financing involves smaller sums, which can be repaid relatively quickly.
- No need to put up collateral on the borrower’s end.
- The cash lent can be spent however you want.
Supply chain financing in India
The availability of supply chain financing bores well for the MSME sector of India, which constitute a 45% share in total industrial production, and 40% of India’s total import and export. Small scale business firms have been active beneficiaries of supply chain finance in India. This has allowed tremendous growth for small scale businesses, as they can obtain easy credit within 2-3 days, which enables them to make more purchases, and which, in turn, accelerates growth.
Additional Read: Which type of companies are eligible to get a Working Capital Loan
Working capital loans have become relatively easy to come by, with many banks and NBFCs providing affordable loan products. We, at Tata Capital, strive to provide you with customized working capital loans to help you grow and improve your business. Apply for a loan today at Tata Capital and enjoy a world of benefits.