1. Beginner's Guide: What is Supplier Financing?
Expand your business and develop your businesses to the next level with Supplier financing. Supplier Financing also known as factoring, receivables discounting, reverse factoring which is the way of arrangement of finances to invest and to grow your export and import business. Globally, Supply chain financing increased by 38% in 2021. But somewhere, this method of increasing fund s is not so popular in India because of lack of awareness and third-party financing companies. Meanwhile, as per a report of Income tax India, India is also growing and breaking the dependency on traditional banks for lending money at lower interest rate. Supplier Financing offers various benefits to both suppliers and buyers. Let’s dig into deep and study Supply chain Financing in more details:
2. What is Supply Chain FInancing?
Supply chain finance is a solution that allows businesses to receive their invoice payment instantly from buyers by using a third-party institution. Suppliers return the invoice amount in any particular time on which bother third-party and supplier agreed on some interest rates. Supply chain financing increases the cash flow and reduces the sort dependency on traditional ways of getting loans at higher interest rates. This method is beneficial for both suppliers, buyers and Supply Chain Financing Providers.
3. How does Supply Chain Financing work?
Supply chain financing works with a chain or network formed while developing their business and lending the money from third parties for it. Supply chain financing involves Supplier, Buyers and Financiers and sometimes dealers who are involved in making a deal between two businesses. Whenever a business needs products that run towards their suppliers and make a purchase. While making a purchase the supplier needs an instant payment to lower the risk of getting no-money or other frauds and to clear the invoice of suppliers, buyers choose third-party financiers and make the payment on their behalf at lowest interest rates. These third-party financing supplies the cash flow to both buyers and suppliers to run their business more impactfully with gaining trust and mutual respect. Third-party financiers can be any bank or banks or any other industrial financiers.
4. 8 Types of Supply Chain Financing Products
Factoring Factoring is a type of supply chain financing which involves a third-party financing provider who purchases the supplier’s outstanding invoices at a discount and provides immediate cash to clear the invoices. Reverse Factoring In reverse financing a financier does not offer the cash to suppliers, meanwhile, these third-parties directly pay the cash to supplier’s invoice on the behalf of buyer at the lowest interest cost of financing. Reverse financing allows the supplier to receive the early invoice’s payment. Dynamic Discounting Using a digital method to offer the discount & financing is the new technology in the market. The financiers use new technologies and offer their financiers to the buyers to clear their invoice on a discount and maintain the cash flow in the market or between businesses. Purchase Order Financing The type of financing in which the buyers receive an early payment on their purchase order from the lenders. Further, after some time these lenders or financiers will receive their money from buyers at an interest rate. The purchase order financing is usually used by small or mid-sized businesses at the condition where they are having no money or either uses these methods because of their low credit scores. Inventory Financing The term inventory financing refers to the short-term loan or revolving line of credit acquired by a company or businesses to make a purchase for their products or to maintain their stock to sell them later. In inventory financing the financiers usually create an asset by using the revolving line of credit by lending on a regular basis. Supply Chain Financing Programs To maintain better cash flow in the market or in business, these lenders offer the money to provide cash to both buyers and suppliers. The financing programs lengthen the payment terms for both sides of businesses or SME suppliers. Trade Credit Insurance Trade Credit Insurance covers the for businesses, if the customer is not able to pay the payment of the debts for the product they have purchased from their businesses. The lenders offer the money and help them to extend the payment terms dictated. It helps businesses to extend the credit date and sell their product in the market more precisely. Payment Processing Solutions Payment processing solutions refer to the various systems, tools, and technologies used by businesses to accept and process payments from their customers. Payment processing solutions can include software, hardware, and services that facilitate the transfer of funds from the customer to the merchant.
5. To Sum Up:
Overall, Supplier chain financing is the best way to give a new direction to your business for both suppliers and buyers. The process will help to increase the cash flow between businesses and lower the risk of late payment or non-payment. This financing method also helps to save your money from interest rates of traditional loan rates from banks and other ways. Supplier financing also solves the problems of not having enough payment at a time for your business needs and helps to grow better in the market.
Frequently Asked Questions
Why is Supply Chain Finance Important?
Supplier Chain Financing brings stability and flexibility to the business and enhances the resources for both suppliers as well as buyers. With the help of supplier chain financing businesses can invest more in products, innovation and increase innovation at the lowest cost of capital and break the traditional ways of lending money with higher interest rates.
Who can Apply For Supply Chain Finance?
To increase the export and import business across the global level a supplier and buyers can both apply for supply chain financing. For suppliers their business should be 2 years old and have generated a total revenue of 1 USD million.
Who benefits from supply chain financing?
Both the suppliers & buyers along with their-party financiers have benefits by the supplier chain financing.