What is Supply Chain Finance? Process, Types, Benefits, and More Explained

Businesses in India, especially the Small and Medium ones (SMEs), face several cashflow challenges that can significantly affect their production, distribution and growth operations. Think of a small manufacturer struggling to meet payroll because a large retail client delayed their payments for months together. This delay leads to a major financial strain, affecting their capacity to buy raw materials, provide salaries and service new orders. This scenario is common across industries.

Supply Chain Finance (SCF) is one such way to address cashflow problems. 

Through SCF, this manufacturer can now get immediate payment for their goods from a registered financial institution, while their larger retail buyer continues to withhold payment.

What is Supply Chain Financing?

BCR Publishing’s World Supply Chain Report 2023 mentions that, year-on-year, global SCF volumes have risen by 21% to US$2,184bn and funds in use are up by 20% to US$858bn. SCF is a smart way to improve business cash flow by adjusting payment terms between buyers and suppliers. As a result, both parties benefit – while the suppliers get paid faster, the buyers enjoy extended credit periods. SCF not only improves your cash flow but also safeguards the supply network during market fluctuations. SCF involves buyers, suppliers and financial institutions, working together to establish a short-term credit based on the buyer’s creditworthiness.

Consider this scenario: You purchase goods from a supplier. Instead of you, a financial institution pays the supplier, often for a small fee, which you later repay based on agreed terms.

Think of it like a credit card for your business.

SCF reduces the financial friction between the buyer and the seller, ensuring that the business relationship continues, by:

• Automating financial transactions by leveraging technology.
• Providing immediate financial benefits without impacting business balance sheets.
• Ensuring smooth and efficient trade, even during global economic uncertainties.
• Boosting supplier and buyer confidence by acting as a trustworthy financial support.

Supply Chain Finance in India – how it works

The Indian market is known to have extended credit periods that go beyond 120-180 days. With a growing economy that is heavily driven by cash-sensitive businesses, the growing need for supply chain finance in India is apparent. In India, SCF practices are mature and often supported by an intermediary financial institution, such as a bank or specialized fintech company.

Large banks such as ICICI Bank, HDFC Bank, Axis Bank and State Bank of India (SBI) have recorded up to a 100% jump in their supply chain financing business.

The SCF process typically involves the following steps:

1. Invoice submission: Suppliers submit invoices for goods or services rendered.
2. Approval: Buyers review and approve these invoices, triggering the SCF process.
3. Financing: A financial institution pays the supplier early, often within days of invoice approval.
4. Repayment: The buyer later settles the amount with the financial institution, aligned with their cash flow cycle.

Indian regulators have stringent guidelines and legal recourse to ensure the success of such models. To support the ecosystem of supply chain finance in India, The Reserve Bank of India (RBI) has launched the Account Aggregator (AA) framework to bring financial data of customers under a centralized platform. This enables suppliers and buyers to access financing options using trade data in a regulated framework.

Types of Supply Chain Finance

SCF comes in the following variants to suit the specific needs of different stakeholders within a supply chain:

1. Reverse Factoring (or Supplier Finance): A popular method where a financier pays suppliers early on behalf of the buyer. The buyer then pays the finance provider on the usual due date. In 2022, global reverse factoring volumes reached $522 bn, demonstrating its vast adoption.
2. Dynamic Discounting: Offers suppliers early payment in exchange for discounts. The discount varies based on how early the payment is made. It is becoming increasingly popular among cash-rich buyers, providing mutual benefits.
3. Inventory Finance: Through this method, businesses can secure capital against unsold inventory. It is particularly useful for businesses that need to stock up on goods but have limited cash flow.
4. Payables Finance: Similar to reverse factoring, payables financing involves a third-party financial institution that pays the supplier’s invoices upon approval by the buyer. The buyer settles the balance with the finance provider at a later date.
5. Receivables Finance: In this method, a company sells its accounts receivable (invoices) to a third party (a bank or a finance company) at a discount in exchange for immediate cash.

Supply Chain Finance Process 

An effective SCF implementation strategy relies on a clear, well-defined process, often supported by digital platforms that ensure transparency and efficiency.

The key steps involved in SCF implementation include:

• Initiation: Buyers establish an SCF program with financial institutions, outlining terms and objectives.
• Invoice submission and approval: Suppliers submit invoices.
• Invoice approval: Buyers approve invoices.
• Financing: Financial institutions disburse payments to suppliers, typically within a few days of approval.
• Repayment: Buyers fulfil their obligations to the financial institution as per the agreed timeline.

Supply Chain Finance benefits across the value chain

For Suppliers

SCF provides suppliers with early access to funds, reducing the risk of late payments or buyer defaults. This is particularly important given that over 60% of SMEs report cash flow challenges as a primary barrier to growth. The improved financial flexibility helps suppliers manage working capital, increase inventory, invest in new projects and cover day-to-day operational costs more effectively.

For Buyers

Buyers benefit from extended credit terms without straining supplier relationships. This additional liquidity aids in better cash flow management, allowing reinvestment into critical business areas. Reliable financial arrangements with suppliers can lead to more favourable terms, better prices, and ensured supply continuity. According to a McKinsey study, companies implementing SCF can improve their working capital by 30%, driving substantial value creation.

For Financiers

SCF represents a low-risk investment opportunity for financiers such as banks and financial institutions. Because the financing is based on the buyer’s creditworthiness, which is typically higher than that of the supplier, the risk of default is significantly lower. This makes SCF an attractive area for financiers to expand their product offerings. Through providing SCF services, financiers can deepen relationships with corporate clients, encourage client retention and attract new business through competitive financing rates and terms.

5 key insights on Supply Chain Finance for decision makers 

1. Enhances cash flow: SCF identifies trapped cash in the Supply chain  and provides suppliers with  early payments on their invoices. For buyers, it allows the extension of payment terms, giving them better control over their cash resources without harming supplier relationships.
2. Reduces risk: By leveraging the creditworthiness of buyers, who are often more financially stable than suppliers, SCF reduces risk for the financing party. This setup ensures financial stability across the supply chain, creating a win-win situation for all parties involved.
3. Strengthens supply chain relationships: SCF builds stronger partnerships between buyers and suppliers, promoting mutual confidence, transparency and better collaboration.
4. Accessible to various businesses: With 40% of SMEs in developed markets now using SCF, these solutions are now increasingly democratized, offering never-before growth opportunities for smaller players as well as larger enterprises.
5. Leverages technological platforms: The adoption of digital SCF platforms are making transactions more transparent, faster and easier to manage and this is expected to grow in the next decade. Technology streamlines the SCF process and offers data analysis and insights, enabling informed decision-making.

Example of Supply Chain Finance 

Consider a mid-sized apparel manufacturer struggling to maintain a robust inventory while managing tight cash flow, especially during peak seasons. By implementing a suitable SCF program in collaboration with a leading financial institution, the firm is now able to secure early payments for its suppliers.

Under this arrangement, after receiving goods and approving invoices from its textile suppliers, the company forwards these invoices to the financial institution. The institution then pays the suppliers almost immediately at a marginal discount. This allows the apparel company to extend its payment terms to the financial institution without straining its suppliers, ensuring a steady supply of raw materials for production. Suppliers benefit from faster payments, enhancing their liquidity and enabling them to invest in materials and labour without delay.

The SCF program allowed the firm to extend its payment terms, freeing up capital to invest in other areas such as product development, market expansion and growth. This arrangement not only stabilized the company’s cash flow but also improved supplier confidence.

Supply Chain Finance FAQs 

How CredAcc empowers Banks & NBFCs with next-gen SCF Solutions

SCF is more than just a financial tool. It is a strategic lever essential for all businesses (SMEs or large enterprises) gearing towards improving their finances and strengthening their supply chain partnerships.  CredAcc’s highly configurable and user-friendly Supply Chain Finance Loan Origination System (LOS) and Loan Management System (LMS) empower financial institutions to deliver fast, reliable, comprehensive and cost-effective SCF solutions.

Through seamless API integrations and a no-code platform, CredAcc enables financial institutions to offer personalized, data-driven SCF solutions that align with the strategic objectives of their clients. CredAcc brings banks, NBFCs, and stakeholders such as corporates, buyers, distributors and vendors on a next gen software platform to facilitate the deployment of a full range of SCF loans.

This technology-driven approach not only accelerates credit origination and underwriting processes but also improves user experience and reduces default risks, ultimately driving superior outcomes and measurable positive impact to both lenders and borrowers.

CredAcc also offers a Supply Chain Finance transaction platform, CredAcc Corp, designed for Indian corporates to maximize transaction efficiency and automate payments. It enables businesses to seamlessly manage channel and vendor finance credit lines across multiple lenders, while maintaining full control over limits, disbursements, invoicing, risk analysis, and payments tracking.

Know how CredAcc’s innovative SCF LOS and LMS can help your organization disburse more SCF loans – faster and with better profits.