Written by Arun Poojari, Co-founder, Cashinvoice
How Supply Chain Financing has played a key role in helping corporates function effectively and boost the economy amidst multiple COVID waves
The Covid-19 outbreak 1.5 years ago was an eye-opener for many organizations. The pandemic not only highlighted the criticality of building an ecosystem with all stakeholders in tandem but also re-introduced them to the vulnerabilities within their supply chains. Supply Chain Finance has come to the aid of the slowing economy in time of need. The financial access and backup available to suppliers in form of Supply Chain Finance have kept the market afloat and have emerged as one of the most proficient ways to improve supply chain resilience and sustainability thus, strengthening the market for future crises. The outbreak of the pandemic and its sudden impact on the world at large forced several companies to explore alternative and innovative ways to fund the supply base to maintain stability in the face of another disruption. As a result, a tightened supply chain and extended payment terms emerged as the two major fallback options in the couple of years. Extended pay terms help companies preserve cash but this strategy can have adverse effects on the suppliers in the long run.
Supply chain financing has come up to speed as it offers a more viable solution for faster payments and can be a valuable source for organizations. It is one of the oldest commercial payment activities and is meant to ensure that businesses always have the availability of working capital to keep the operations and in turn the economy, running. Supply Chain Financing will gain a stronger foothold in the wake of the pandemic where cash is king!
In an ideal scenario a company benefits from a healthy cash flow when they focus on improving the basic procedures of working:
- Improving liquidity
- Necessitating invoice approvals
- Defining payment timings
It is difficult for the generally scarcely equipped SMEs and MSME to take care of these requirements on their own and that’s why the trend of onboarding the supply chain financing firms that partner with large financial institutions to offset the risk and decrease the dependency on limited financers, is on the rise.
A Change Accelerated By The Pandemic
The adoption and embracing of new technologies became important in times of crises due to the world going under a lockdown and demands of supply chain finance rising globally. The Supply Chain Finance volumes have been on the rise over the past years but it has seen an extensive rise in the last 18 months. Traditionally, Supply Chain Finance has been a fairly slow and cumbersome process. It has been the document-heavy, slow manual systems which include the intense Know Your Customer (KYC) checks which are often not feasible for time-sensitive and low-manpower SMEs. These drawbacks and inefficient systems make SCF a less attractive and less profitable option for lenders.
The new wave of digitization looks at dealing with this problem by making the service more efficient and transparent as the integrated systems simplify information sharing and KYC.
Owing to the Covid-19 lockdowns in various states when getting and transferring physical documents is a difficult proposition, the role of technology has become even more important. Digitization offers a more efficient and less resource-heavy solution that makes banking and SCF services more profitable in the future.
The measures that can change the face of SCF for the future:
It is time to adopt and encourage the adoption of integrated and digitized systems to pull up the economy rather than let the current measures hamstring a reeling global economy. The new technologies will bring about the following change in how supply chain finance functions:
- Reduce Risk and Offer Benefits: The digitized systems allow banks and institutions to understand supplier creditworthiness at a granular level. The access to in-depth data and knowledge can help financiers reduce risks and offer the benefits of the program to a larger group of suppliers.
- Create a balance between assets and liabilities: Companies need to optimize working capital to make sure that they have sufficient cash flow to meet short-term operating costs or debt payments. However, there are complexities associated with monetisation of an asset therefore the process of optimization focuses more on cashable assets. Companies would need to manage their finances and inventory. Checking the finances will help in expediting the receivables collections of extending payment terms while inventory management can help divert cash flow.
- Make other financing options available: Organisations and suppliers are no longer dependent on a single source to ease their cash flow. Technological advancements and digitization haves expanded the reach and enabled multiple players to offer higher value and lucrative financing alternatives. Digitization has enabled:
- easy communication
- uninterrupted fund transfer
- continuous tracking of funds by both buyer and supplier
- speed up the legal processes
- reduction in the working capital.
- Focus on sustainable approach: COVID-19 pushed sustainability as the topmost priority for organizations. Supply chain financing can play a critical role in the implementation of a sustainability strategy. By adopting technological advancements, for instance, the eco-hazard of using paper can be eliminated. According to reports, supply chain financing involves an enormous amount of paper invoices and paper cheques. Technology can help companies reduce the overall carbon footprint by over 30%.
Supply Chain Financing is an important proposition right now for the global economy to flourish in times of the current pandemic. Technologies like Machine Learning, Artificial Intelligence, Blockchain, Internet of Things are at their nascent stages in the SCF industry, however, we are likely to see some huge advancements shortly. For example, the Internet Of Things (IoT) can be implemented at various stages of supply chain financing, thereby making the entire process more transparent, efficient, responsive, and reactive. Elements of IoT, such as data and analytics, can be used to conduct the due diligence of the suppliers. Furthermore, supply chain financing can use AI to optimize working capital, as well as to maximize access to the suppliers.
Supply Chain Financing can enjoy much greater prominence in the coming years. The need of the hour is a healthy collaboration of technological and human capabilities and that’s the only way to help the industry overcome future disruptions.