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Supply Chain Finance Bridging the Gap of Funding for MSMEs

Supply chain finance, M1xchange

What is Supply Chain Finance (SCF)?

The tech-based integrated solutions that help bring down financing costs while raising the efficiency of the business for both buyers and sellers for every sales transaction is what we call supply chain finance (SCF).

Supply chain finance works all the way from initiation of every transaction to conclusion while aiming to automatize the tracking and transactions entirely. Supply chain finance has approved distinct advantages for all the parties involved. It enables the buyers to approve financing of invoices of the suppliers by a financial entity (called factors) and the provision of working capital through short-term credit facility smoothened liquidity for both parties. Another aspect of these benefits encompasses the better leverage for buyers in terms of time to be able to pay their dues and for suppliers to get money quickly. 

Here, both the parties on both ends can leverage this quick money availability to go for newer projects as well as for smooth maintenance and running of the existing due to the increased liquidity.

How Does Supply Chain Financing Work?

Supply chain financing goes through with mechanism of Invoice Discounting, all of which has summed up as below:

  • To verify if both sellers and debtors are suitable to participate in supply chain financing, KYC, and due diligence conducted on both the parties.
  • Next, the party at the selling end sends the invoice to their debtor who then sells it to a financial entity.
  • The financial entity releases about 80% of the amount instead of all as a protection against any defaults by the debtor.
  • Upon maturity after the debtor has made the full payment of the invoice amount, the funds are then sent to the account of the financial entity.
  • Lastly, the remaining 20% are paid to the seller by the intermediary.

A further breakdown of the supply chain finance funding can be as follows:

  • An invoice is given to the buyer by the supplier.
  • The lender receives a confirmation of payment approval by the buyer.
  • Financial entity gives almost the whole (not entire) amount to the supplier.
  • The buyer pays the financial entity when the due date of the payment arrives.

Hence, under the supply chain financing, since the supplier gets money in a few days without having to wait for a long time until the due date, the cash flow is seamless. On the other hand, with an extended repayment tenure, the buyers can go about and the relationship with suppliers remains unhampered.

Supply Chain Finance: Features and Benefits

Features Of Supply Chain Finance

  • Has a provision credit and loans for the short term that can be circulated as the working capital or for procuring stocks.
  • The need for collateral is done away and your stocks act as your collateral.
  • Loans are easier to obtain as opposed to conventional ways of obtaining loans from 10lakhs to 20 cr.
  • The process of financing is absolutely customised to suit every businesses’ procedures and cycles.
  • Gives seamless short for seasonal demands as a steady working capital source.
  • Gives the provision to stack inventory according to the personal needs of every business.
  • The tenor is flexible.

Benefits of Supply Chain Finance

Balancing the needs of your business with that of your suppliers is indeed at the heart of every good supply chain finance program as it is beneficial to both in both short as well as the long run. Let us explore some benefits of supply chain finance:

Benefits for buyers

As a buyer, on one hand, your suppliers will expect to get their payments from you asap and on the other hand, you’ll wish to get an extension for making the payments for the invoices with you. Supply chain finance can help both parties by helping suppliers get their due amounts earlier besides providing an extension to the buyers to make the payment. Supply chain financing has numerous due to this, some of them are:

  • Improvisation of working capital: Supply chain finance facilitates better cash mobility along with better payment cycles which facilitates better working capital.
  • Reduction in risks involved with supply chain: With supply chain financing as the financing becomes more affordable, the risks to disruption of the chain are reduced manifolds.
  • Stronger and better supplier relationships: Supply chain financing improves the provision of working capital for suppliers and hence, is a great tool to corroborate relationships with suppliers.
  • Advantage while negotiating: For commercial terms leverage, supply chain financing is a great tool for suppliers.
  • Stronger growth of businesses: Supply chain financing puts your business in a much better place by helping suppliers keep up with demand through new investments.

Benefits for suppliers

Suppliers enjoy numerous benefits from supply chain finance just as buyers do, some of them are:

  • Benefits through readily available working capital: Through early payments, the suppliers can go a long way in working their position up using the available working capital.
  • Lesser funding costs: the financing cost of suppliers through supply chain financing is lower since it doesn’t take into consideration any traditional ways to measure credit.
  • Improvements in cash flow: As we discussed above, as cash liquidity improved suppliers can go and invest further in new projects or the existing ones.
  • Better forecasting of cash flow: Better knowledge of funds and payments can help make much more lucid and to the point forecasts.
  • A user-friendly platform to have access to: With supply chain finance services, you can have perfect visibility of all the transactions with easy access to it through the application.

Supply chain finance: Interest rates and fees

Generally, lenders offer supply chain financing at a percentage that has been predetermined wrt the invoice value and can vary between 80% – 90%. The facilities for invoice discounting commonly vary between 4.5% – 8.5%. 

How is supply chain finance different from trade finance?

Supply chain finance:

It is invoice factoring, but here the buyers initiate the process by deciding which invoices to make the payment for and post which only the supplier can choose which invoices he wants to cash out first.  So essentially, all three parties work in sync instead of doing their work individually.

Trade finance:

Trade finance too like supply chain finance requires an understanding between the three parties involved. The financial entity plays an essential role to help them encash the roles and documentation work to take care of the billing. Also, in trade finance, the seller’s bank on the basis of trading contracts can also advance loans and advances.

What is Supply Chain Management?

Supply chain management (SCM) is fundamentally centered around effectively coordinating a complex network of tasks that enable the seamless flow of products, services, and information from suppliers to final consumers. It encompasses a spectrum of processes spanning from sourcing raw materials to manufacturing, distribution, and final product delivery. The essence of Supply Chain Management lies in the seamless coordination of upstream and downstream activities, ensuring cohesion among stakeholders across the supply chain network.

SCF By M1xchange (About M1Xchange TReDS Platform, Benefits of M1Xchange)

The Reserve Bank of India granted approval to Mynd Solutions Pvt Limited to set up and operate M1xchange, the first trade receivable exchange in India. M1xchange has digitally transformed the process of gaining access to working capital for MSMEs via invoice discounting through multiple financiers. TReDS is an answer to the everlasting cash flow issues of the MSMEs in India and an effective solution to drive the MSME sector to the next phase of the Indian economy.

On November 2, 2018, the Department of Micro, Small and Medium Enterprises issued a notification stating that all companies registered under the Companies Act and having a turnover of more than INR 500 crores and all Central Public Sector Enterprises required to onboard a TReDS platform, thus making TReDS registration mandatory for such companies. The Registrar of Companies (RoC) in every state has nominated to be the competent authority to monitor the compliance of this notification.

  • MSMEs get greater access to finance, at competitive rates without providing any additional collateral. Also, the financing is without recourse to the MSMEs.
  • Corporates(Reverse Factoring) save on procurement costs through an improved negotiation of financing terms for their vendors.
  • Financiers (Factoring Finance) get an opportunity to build PSL asset portfolios on Trade Receivable Exchange platforms like M1xchange.


What is supply chain finance?

The tech-based integrated solutions that help bring down financing costs while raising the efficiency of the business for both buyers and sellers for every sales transaction is what we call supply chain finance (SCF).

How to avail of Supply Chain Finance?

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

How will Supply Chain Finance benefit your company?

It connects buyers & sellers with financing institutions. As a result, it helps corporates to lower financing costs and improve efficiency. Most importantly, it unlocks working capital tied in the supply chain.

What will be the future of Supply Chain Finance?

Among both users and service providers, there is a growing sense that SCF has weathered its first great crisis and is now ready to play a prominent role in global recovery.

How does M1xchange help with Supply Chain Finance?

M1xchange helps connect businesses with financiers digitally to provide financing solutions for their supply chain. It facilitates invoice discounting and factoring to help businesses access working capital and improve cash flow.

Is supply chain finance part of trade finance?

While supply chain finance and trade finance are related, they are not the same thing. Supply chain finance is focused on financing the supply chain, while trade finance is focused on mitigating the risks associated with international trade. While there can be overlap between the two, supply chain finance is not typically considered a part of trade finance.

How long does it take to get a supply chain finance program up and running?

The timeline for setting up a supply chain finance program on M1xchange can vary depending on the specific requirements of the program, but it typically takes around 2-4 weeks to get the program up and running. This includes the onboarding of buyers and suppliers, integration with existing systems, and the necessary agreements and documentation.

Tags: , , Last modified: February 20, 2024