Types of Supply Chain Finance- An Ultimate Guide

In this blog, we’ll delve into the exciting developments in the supply chain financing industry worldwide and explore the promising future of supply chain financing in India. So, sit tight and get ready to be inspired!

What is Supply Chain Financing?

Financing the supply chain entails managing working capital and liquidity needs through technology-driven services and risk mitigation methods. The major participants in an SCF process flow are the suppliers, the buyers, and the SCF providers. Providers of SCF (which can include banks and fintech firms) facilitate the usage of a digital platform by both buyers and sellers to streamline the process of securing funding for the goods they exchange. You can contact MSME Blog if you want an online platform that empowers small and medium businesses with the tools they need to thrive in today’s global economy.

Different Types of Supply Chain Finance

There are two broad types of supply chain financing options:

  • Selling your accounts receivable to a financing company is one-way businesses can access working capital.
  • Loan-based financing solutions are loans and advances without collateral (e.g., inventory, receivables).

Receivable Purchase

  1. Receivables discounting
  2. Factoring
  3. Forfaiting
  4. Reverse factoring

Loan-based Financing

  1. Loan against receivables
  2. Pre-shipment finance
  3. Distributor finance
  4. Loan against inventory

Types of Supply Chain Finance- Receivable Purchase & Loan-based Financing

Let us elaborate on the different types of supply chain finance here.

Receivable Purchase

Receivables discounting, factoring, forfaiting and reverse factoring are the most common forms of purchasing receivables.

  1. Receivable discounting is taking out a loan from a financial institution. Creditors often lend money based on suppliers’ receivables after deducting for bad debts and suspicious accounts.
  2. The supplier sells their accounts receivable (debtors) to an issuing bank at a discount (called a “factor”) in a process known as “factoring.” Factoring is a form of receivables financing in which a financial institution acts as an agent of the supplier to collect payments from the supplier’s debtors in exchange for a fee.
  3. Forfaiting sells exporters’ receivables to financial institutions to get medium- to long-term financing for the company. Most exporters do this to get paid quickly for their goods and avoid chasing down their customers for payment.
  4. Reverse factoring is a form of supplier financing in which the supplier receives a cash advance from the financier to cover his payables and qualify for discounts.

Loan-based Financing
The various kinds of loan-based financing are:

  1. To secure loan-based financing, a buyer or supplier must liquidate their assets (such as stockpiles) to the financiers. Distributor financing is borrowing money from financial institutions in exchange for future receivables or other liquid assets to cover inventory holding costs and keep the business afloat until the items can be sold.
  2. Pre-shipment financing refers to a loan given to an exporter before the shipping to cover costs associated with the export, such as procurement, production, and packaging. It helps the importer carry out the export by acting as a packaging credit.
  3. To acquire an inventory advance, one must first have inventory to utilize as collateral with the financing company.
  4. Getting an advance against receivables is a way to get paid ahead of schedule, satisfy liquidity needs, and provide customers with the option to pay when it’s most convenient for them, all at the same time.

Supply chain financing is a powerful tool that benefits buyers and sellers by facilitating the smooth flow of goods and capital. So, whether you’re a supplier, a buyer, or a financier, it’s time to embrace the exciting world of supply chain financing and reap the rewards.

Leave a Reply

Your email address will not be published. Required fields are marked *