5 Myths about Supply Chain Finance

13 Oct 2022
5-myths-about-supply-chain-finance

As Supply Chain Finance (SCF) has evolved and is growing, it could not keep itself aloof from certain fallacies. SCF is one of the best tools to keep a supply chain in order. It fortifies relationships between different companies within a supply chain and ensures that Small and Medium Enterprises (SMEs) have a constant supply of raw materials. Lack of creditworthiness with small-scale businesses may pose them with challenges in procuring raw materials leading to a disruption in the supply chain. However, SCF helps them use the creditworthiness of their larger partners.

Here are the top 5 misconceptions that need to be dispelled for realizing the true benefits and potential of SCF.

Myth 1: Only large companies derive benefits from SCF and only banks are the providers.

This is no longer true with the help of technological innovation and the emergence of Fintechs like us. They provide supply chain finance to several industries including manufacturing and services. Previously, banks were the only ones offering SCF solutions and access to them too was very limited. Moreover, traditional banking has always lacked an approach by small companies. As a result, only larger companies approached banks for SCF solutions and availed of more than 60% of the available credit.

But with Fintechs entering the market, the use of technology has bridged the financial gaps. They have been able to streamline and automate the processes essential to manage the SCF. This also resulted in the participation of many more suppliers further strengthening the supply chain and empowering small businesses by making low-cost credit options easily accessible.

Hence, even small companies are making the best use of SCF benefits, and yes, banks are not the only providers.

Myth 2: Payment terms become long due to SCF.

Although SCF adds flexibility for suppliers, it does not impact the payment terms. As a part of the system, a third party makes the payment to the supplier even earlier than anticipated. This gives some time to the buyer to make the payment to this third party on time as agreed. This credit system extends flexibility in a manner that the supply chain does not halt. It runs seamlessly.

Many suppliers are in the need of working capital loans. SCF enables them to access timely funds to meet their unique needs. In fact, SCF has been able to reduce payment terms and supply chain fluctuations.

Myth 3: Suppliers use SCF to mask debts.

Well, this is far from reality. Most of the companies using SCF do so to ensure an uninterrupted supply chain function. SCF is not a form of obscure lending. These solutions are designed to help the suppliers that lie within a particular supply chain when they need immediate access to a working capital loan or other financing needs. SCF helps suppliers receive early payments. And for buyers, it helps in extending days payable outstanding (DPO).

Myth 4: SCF is not reliable.

Although a financial institution may tend to draw credit lines to reduce their risk exposure. However, in the case of SCF, financial institutions see minimum risk exposure and a high stability rate. As a result, they invest more in SCF-based loans to increase funding that can support high volumes of finished goods.

With fair payment terms, SCF can be a great and reliable financial solution for suppliers and buyers.

Myth 5: SCF meets only financial goals.

While the financial benefits of early payments through SCF cannot be denied, SCF clearly is not just about financial loans. SCF helps companies falling within the supply chain to promote their environmental, social, and governance (ESG) goals.

Large companies often encourage ESG score improvements by helping small and minority-owned businesses with better rates so that they can perform better in this respect. This helps more businesses in unlocking cash and make the supply chain streamlined besides offering the added advantage of better controlling the working capital.

Conclusion

SCF is a financial tool helping SMEs and other companies within a supply chain access timely finance to keep the supply chain uninterrupted. Often people have misconceptions regarding SCF. And debunking them is a step to ensure its beneficiaries can make the most of it without falling in for any false information. SCF has been helping expand the meaning and essence of ‘fundable transactions’. It can truly be said that SCF helps maintain superior supply chain financial health which is responsible for fueling the real economy on a large scale.

Also Read:-
How to deal with longer working capital cycles?

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