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Scope and Future of Supply Chain Financing

By Athena Rebello

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Updated on: Sep 1st, 2023

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6 min read

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Supply chain finance is a technology-based financing solution that allows suppliers to receive early payment on their invoices. It helps mitigate the risks of supply chain disruptions and reduces financing costs. Plus, it increases cash flows and enhances profitability for both buyers and sellers in a sales transaction. 

But what does the scope and future of supply chain financing look like? Read along as we discuss that in detail.

Evolution Of Supply Chain Financing

Supply chain financing involves a process that begins when a buyer purchases goods or services from a supplier. The supplier then creates an invoice with a payment deadline. After the buyer approves the invoices, the supplier seeks payment for the invoice within the stated deadline.

To help the supplier get paid quickly, at this point, a financier may step in and take a small fee for their services. When the invoice matures, the buyer pays the financier instead of the supplier, breaking from the usual method of paying the supplier directly.

Initially, supply chain financing was perceived as a technique where large companies used their financial strength to help their trading partners secure finance at lower rates. However, since then, the supply chain concept has evolved significantly. The modern global supply chain ensures that companies now use their surplus cash to directly offer liquidity leverage to their suppliers. This allows them to expand their support to trading partners through various finance options. 

Supply chain financing also ensures no lengthy application process or waiting time to receive funding. Here are some more reasons why supply chain financing is a popular funding option.

  • It doesn't follow the usual credit measurement approach and reduces the suppliers' financing costs.
  • The supply chain financing model finances a transaction through the buyer. With a strong credit rating, the supplier receives a lower interest rate.
  • In a supply chain finance agreement, the buyer and the supplier profit from the other’s success. For example, if a supplier goes out of business, the buyer loses supply. Similarly, if the buyer has problems, he will not be able to pay back the supplier.
  • Supply chain financing provides businesses with new approaches to predict the industry's demand patterns and optimise inventory accordingly.

Future Of Supply Chain Financing

With the global economy evolving, the scope of supply chain financing is full of many advancements, including:

  • Technology: Blockchain, artificial intelligence, and data analytics are set to revolutionise supply chain financing by improving transparency and decreasing supply chain fraud.
  • Multiple players: With supply chain financing becoming popular, many providers will start offering financing solutions. This gives suppliers access to a range of funding sources that suit their needs.

Challenges In the Expansion Of Supply Chain Financing

Here are some challenges associated with the expansion of supply chain financing:

  • Adoption: It takes time, effort, and money to integrate new technology into existing processes. So, if you are using legacy systems, adopting supply chain financing may be a challenge.
  • Security: You share your company's private financial and other information with many different parties. Hence, any critical data leakages could cause big problems for everyone involved.
  • Complexity: Supply chains are highly complex, with many various partners at play. The intricacies of these multidimensional supply chains can make it difficult to determine the most suitable financing option for each party involved.
  • Management: As businesses increasingly operate on a global scale, cross-border supply chains and transactions become more common. Effectively dealing with multiple currencies, different legal systems, and varying regulatory environments can be a challenge.

Innovations And Developments In Supply Chain Financing

Here are some innovations and developments emerging in the supply chain financing industry:

  • Integrations: Integrations: You can link trade, logistics, and e-commerce systems to supply chain financing. This increases productivity, reduces expenses, and improves inventory management. 
  • Sustainability: Financial institutions can consider environmental, social, and governance (ESG) factors when financing. This will encourage businesses to comply with ESG practices and support fair labour standards.
  • Digitisation: Adopting new digital tools such as bank payment obligation (BPO) can enhance supply chain financing. The BPO operates similarly to a letter of credit (L/C) but with improved digital processes. Unlike the traditional paper-based L/C, the BPO executes this process electronically through data transfer, making it faster and more efficient.
About the Author

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

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