Supply Chain Finance (SCF): What It Is, How It Works, Example

A. Dealer Finance

Overview: 
The Dealer Finance programme offers working capital credit to dealers, distributors, and channel partners of large corporates, helping them purchase and maintain inventory supplied by these corporates.

Key Features:

• Working capital support for purchasing and stocking inventory
• Competitive interest rates due to lower cost of funds
• Collateral-free financing
• Minimal documentation requirements
• Extended repayment period aligned with the business cycle
• Up to 100% funding of the invoice value

B. Vendor Finance

Overview: 
The Vendor Finance programme provides working capital credit to vendors and suppliers of large corporates, enabling them to unlock funds against their receivables and maintain healthy cash flow.

Key Features:

• Lower cost of borrowing by leveraging the buyer’s credit profile
• Faster conversion of receivables into cash
• Improved liquidity and cash flow management
• Reduced reliance on traditional business loans
• Early payment support, lowering financial dependence on the buyer
• Up to 100% funding of the invoice value

Supply chain financing encompasses a set of short-term credit solutions to improve the working capital, remove hindrances to manufacturing and production, and lower the financing costs of buyers and sellers linked in a transaction. There are three main parties involved; the buyer, the seller, and the financing institute. As a financing institute, Bajaj Finserv offers supply chain finance of up to 80 lakh on simple eligibility terms. Businesses can get instant approval in just 48 hours* by applying online and submitting the basic documents.

Bajaj Finserv brings supply chain finance in India to provide sufficient liquidity in the supply chain so that the movement of goods is not blocked due to fund shortage. It offers a low-risk, cost-effective means of providing suppliers with liquidity by leveraging the credit rating of your customers (buyers). Businesses can thus make the most of this funding to streamline their supply chain.

How supply chain finance works?

Supply chain finance is a way of improving cash flow by allowing buyers to pay their suppliers later, while giving suppliers the option to get paid earlier by a third-party financier.

Supply chain finance is a process where a buyer initiates a payment to a supplier through a financier. The financier pays the supplier immediately and collects the payment from the buyer later. This reduces the financing costs and risks for both parties.

Supply chain finance is a form of reverse factoring, where a buyer approves the invoices of a supplier for financing by a bank or other institution. The supplier gets paid faster, while the buyer gets more time to pay.

Example of supply chain finance

When a buyer orders goods from a seller, the usual process is straightforward. First, the seller ships the goods to the buyer. After shipping, the seller sends an invoice to the buyer, often with payment terms like ‘net 30.’ This means the buyer has 30 days to pay the invoice from the date they receive it. Essentially, the buyer gets a month to settle the bill for the goods received. This payment term helps in managing cash flow for both parties, allowing the buyer enough time to gather funds while ensuring the seller gets paid within a reasonable period.

Supply chain finance process

The supply chain finance process begins with a buyer sourcing goods or services from a supplier. Once the buyer approves the invoice, the supplier can elect to receive early payment from a financial institution at a discounted rate or wait for the payment term to expire. The buyer can then extend the payment term and preserve its working capital. The financial institution finances the requested early payment and manages the repayment from the buyer. The process benefits all parties involved by providing liquidity, reducing costs, and optimising the supply chain.

Challenges of supply chain finance

While supply chain finance offers significant benefits, there are some challenges that businesses must address. One of the major challenges is the lack of trust among suppliers and buyers. Another challenge is the complexity of existing supply chain systems and the need for customised solutions for each supplier. Additionally, managing payment cycles requires coordination among multiple stakeholders, which can be challenging. The efficiency and success of supply chain finance require the need for technology-driven solutions, risk assessment and mitigation, and effective communication to overcome these challenges.

Techniques used in supply chain finance

Some techniques used in supply chain finance are:

• Reverse factoring: The buyer approves the invoices of the supplier for financing by a third party, who pays the supplier and collects from the buyer later.
• Dynamic discounting: The buyer offers discounts to the supplier for early payment, based on the number of days before the due date.
• Payables finance: The buyer sells its accounts payable to a financier, who pays the supplier and collects from the buyer later.

Supply chain finance works in two ways:

Invoice discounting: This is a means of unlocking cash that’s tied up in your unpaid customer invoices. The invoices generated by a business (seller) are discounted, and loans are provided so that a business does not have to wait for bill clearance and make payments in time. You, the seller, approach Bajaj Finserv to summarise your customer invoices to receive funds immediately as a discounted amount. Simultaneously, the buyer gets an extended period for bill payment which the financial institution collects in full on maturity.

Purchase order financing (invoice factoring): This provides a way for you (seller) to purchase inventory or manufacture goods by leveraging a purchase order made by a customer. You (seller) can approach Bajaj Finserv with a purchase order. Bajaj Finserv then guarantees credit to your supplier and collaborates with it to fulfil the order. Your supplier ships the order to your customer, who, in turn, pays Bajaj Finserv. Lastly, we remit funds to you minus our financing costs.

We offer cost-effective supply chain financing. Buyers and sellers can negotiate the supply chain finance terms based on the leverage, that is, the invoices or purchase orders and the credit ratings of the parties involved.

Eligibility is assessed using the following criteria: 
a) Banking records, financial statements, and GST compliance 
b) Sales and purchase performance 
c) Credit bureau history 
d) Internal scoring and risk assessment model

Supply chain finance works best when the buyer's credit rating is higher than the seller's credit rating. 

The main documents required for supply chain financing are identity proof, address proof, financial documents and business ownership documents. 

• Interest Rate: Ranges between 9% and 12% per annum
• Processing Fee: Up to 2.95% of the approved SCF facility amount
• Stamp Duty: Applicable as per the stamp laws of the respective state
• Bounce Charges: Rs. 1,500 per instance
• Bounce charges apply in cases of dishonour of any payment instrument or failure to pay instalments on the due date due to reasons such as mandate dishonour, non-registration of the mandate, or any other cause.
• Penal Charges: Any delay in instalment payment will attract a penal charge at 36% per annum on the overdue instalment, calculated from the due date until the full amount is received.

How to apply for supply chain finance (SCF)

The application form must be completed with the following details and verified through OTP authentication:

1. Product of interest – Dealer Finance or Vendor Finance
2. Anchor company name
3. Applicant company name
4. Required loan amount
5. Mobile number
6. Email ID
7. City
8. State

Helpful resources and tips for business loan borrowers

Bajaj Finserv offers supply chain loans that come with nominal interest rates and no hidden charges. For a complete list of the applicable fees, click here.