Supply Chain Finance · 17 April 2020 · admin
A look at why supply chain finance creates aligned incentives for buyers, suppliers, and financiers alike.
Supply chain can be defined as the entire process of execution and monitoring of all the steps from Origination of product of goods or service till its end consumption by last mile user. The execution and monitoring is essentially of movement of goods or services and related information from one party to next party till last party.
At each step or stage, it contains the cost element for delivering goods or services and cost of working capital (capital to finance the gap between incurrence of all expenses to deliver goods or service and receiving the revenue).
Each party in this cycle tries to manage its working capital to make the business running. For this, Large Corporates always try to delay its payments by demanding longer payment terms and on the other hand, SME’s (Small and Medium Enterprises) who are supplying raw material or acting as Dealer/Distributor try to get paid at the earliest possible. As generally, there are lot of SME’s who wants to work with large corporates, they tend to agree to longer payment terms in want of business. Here starts the financing problem for SME’s.
SME’s, globally, face problem to access timely and competitive financing. As per various studies, it has been shown that they struggle for timely and competitive financing due to following factors:
Many SME’s do not have much data points available for credit assessment by Financial Institutions
SME’s repayment capacity is perceived much lesser by Financial institutions than a large corporate
In Traditional way, loans are approved by Financial institution mainly on the basis of last year financials, which creates problem not only for new start-up companies but also for fast growing companies whose working capital requirement keeps on increasing every year
SME’s generally need to furnish collaterals and this limits their access to financing to certain level only which is generally much lesser than their requirement per growth potential
SME’s are generally not rated or not so well rated by credit rating agencies, basis their limited resources
While SME’s do not get competitive and faster finance due to above factors, large corporates need to manage their working capital due to following factors:
Expansion activities
Larger capex commitments
Keeping its working capital loan balances minimum to have better financials which impacts its market share
As we can understand from above, working capital management is an important aspect for large corporate and SME’s both inspite of their different goodwill, status and reputation with Financial institutions. This makes both the parties to negotiate for payment terms.
To manage its working capital, SME’s generally end up taking finance at higher interest cost and include the same silently in its cost of delivering goods or services. So, while Large corporate is taking advantage of longer payment terms, it may not be actually optimizing its working capital.
Here comes the role of Supply chain finance into play. Supply Chain Finance (SCF) is the financing technique to make funds available to the party being part of supply chain transaction at faster & competitive way and creating a ‘benefit to all’ scenario involved in that Supply chain.
Traditionally, Banks have been facilitating the SCF to finance the working capital needed for Supply chain however there have been lot of challenges as to get access to entire flow of information from one party to other and this has always funded the requirement to a limited level.
Off late, globally, many fintech companies have emerged and have tried to solve this puzzle through use of technology by bringing all participants at one place. The platform enables the visibility of flow of information from one party to other and as the same available to third party financiers, it makes it easier for them to take financing decision for the transaction. This makes the overall proposition win-win for all participants. It is important that such fintech add value to the process by seamless integration, user friendly technology and transparent view of underlying transactions, without requiring participant to invest in technology as this works generally on use basis. Inspite of entry of many fintech companies in this space, still huge demand is unmet and there is lot of scope globally to address the gap.
RAMSUN Network is tech enabled marketplace which brings Large corporates, SME Suppliers or Dealers/Distributors and multiple Financial institution at one place, thereby enabling the transparent view. It facilitates the Supply chain financing through various methods:
This method is generally used when funds are required from third party financial institutions to finance the supply chain transaction. To manage the payable financing, Supply chain solutions such as Supplier Financing or Reverse Factoring are used to take advantage of better reputation of large corporates than SME’s. Better reputation of large corporate enables financial institution to lend at cheaper rate than otherwise available to SME.
This will enable SME to be part of supply chain finance and get early payment. Even if large corporate enlarges its payment term with Supplier while facilitating this financing to its SME suppliers, it is still of advantage to SME supplier whose direct financing cost is generally much higher than the interest cost of larger payment term.
Fintech’s like RAMSUN Network enables various variant to finance the entire value chain seamlessly through multiple financiers.
This has come up as a new variant of Supply Chain finance in past few years. Dynamic Discounting is generally used by Large Corporates to offer early payments to its suppliers by using its own surplus funds in lieu of cash discounts. These cash discounts are essentially risk free returns for the corporate which increases its ROI on capital and enhancing its bottom line profit.
SME’s, who are either not getting access to financing at all or getting access to collateral based high interest financing, generally are more inclined to this alternate as this helps them to get faster recovery of debt and cheaper interest cost (than financing cost they have to incur otherwise to arrange working capital). Also, this takes care of their risk of any bad debt of receivables. Fintech’s like RAMSUN Network enables multiple variant of Dynamic discounting to suit the requirement of particular corporate and its processes.
As Supply Chain Financing is growing in almost all the regions and countries, fintechs like RAMSUN Network are facilitating not only Supply chain financing solutions, but supply chain related other solutions also which help in overall efficiency in the process and results in cost saving.
Supply chain finance (SCF) market in India is over USD 100 billion in India and over USD 2 Trillion globally and is expected to increase significantly in the years to come. It is expected to result in more and more innovative solutions to lessen the overall cost and increase the efficiency of supply chain processes.
Most Fintech platforms working in the areas of Supply Chain Financing and Dynamic discounting, focus on enabling the workflows between the participants, while the heavy lifting working is still left to be done by the participants including the large corporates and financing institutions.
Some of the Fintech’s are also providing integration with the ERPs of the customers, which eases the ongoing effort on the side of the participants, but entails months of effort from the participants’ technology teams. The effort involved from the participants leads to increased friction from them and hence the adoption of such Fintech platforms is limited.
There are many ways additional technology interventions could reduce such friction. Some of the points that could reduce such friction are as follows:
The integration process with the participants systems needs to be a quick process having minimal involvement from the participant side
Whether it is Dynamic discounting or Supply Chain Finance, largely the rate of interest or discount negotiation is still happening through manual offline processes, which reduces the scalability and the adoption rate of such platforms. Use of Artificial intelligence to arrive at a price point acceptable to both parties could help bring down this offline negotiation effort.
Establish mechanisms to give confidence on the genuineness of the underlying invoices, through deeper integration with the systems of the large corporates as well as those of their suppliers and dealers, and from the GST and other government platforms
Address the key pain-point of Financial Institutions i.e. of onboarding of the participants. Fintech platforms should be able to assist the financial institutions to ease their sourcing, KYC and onboarding processes apart from transaction initiation process. This could be enabled through digital onboarding, KYC and agreement execution processes. However, all of this has to be in compliance with the regulatory guidelines applicable to the financial institutions.
There are many other ways through which the Fintech platforms could ease the processes for financial institutions and bring scale and provide coverage of the demand that exists in the market.
To summarise, Supply chain Finance is “Win Win to All” way of Financing. For Supply chain Finance to succeed, the company’s processes should be SCF friendly using maximum automation and use of right technology by the Fintech platform to bring all participants on one platform thus enabling transparency and speed in overall process. Right fintech partner with expert team can enable the same and unlock the money stuck in supply chain of companies to increase the liquidity for businesses in the entire value chain.
Ramesh Bisht is the Co-Founder for Ramsun Network and has served leadership roles in one of leading TReDS platform and many domestic and multi- national companies prior to Ramsun Network.
RAMSUN Network (www.ramsunnetwork.com) is AI enabled marketplace for Supply chain solution, which not only enables Supply Chain Finance but helps Corporates by driving cost saving through automating their processes
Supply Chain Finance
Supply Chain Finance
