The investment market is no longer increasing exponentially on the equities and mutual fund side of assets. Still, new-age asset classes have emerged in the fintech segment that focus on the benefits of India’s underutilised debt market. According to industry sources, the addressable supply chain financing market in India is worth roughly ₹60,000 crores, with a total market value of ₹18 lakh crore. Supply chain financing (SCF) provides a two-in-one solution: short-term loans to fund enterprises’ supply chain activities, making SCF an investable & reliable asset class for lenders and financiers.
We frequently discuss the billions in working capital that buyers can access through supply chain finance. However, what about suppliers? What are their opinions of supply chain financing, and how might it support them in navigating the current socio-economic unpredictability?
Companies rely every day on working capital to fund their everyday operations. While, on the one hand, suppliers want to receive capital as soon as they sell, on the other hand, buyers want longer credit periods to ensure that the inventories are sold off so that there is no pile-up. Suppliers also leverage these funds to arm themselves for expansion as well as during uncertain economic phases.
MSMEs and working capital problems
While companies with investment-grade credit ratings have the support of banks to avail credit, since banks feel it is prudent to lend to bigger businesses, they don’t feel the same about small and medium-sized firms. Due to this, most downstream channel members, including suppliers, distributors and dealers, especially in tier 2 and tier 3 cities, continue to deal with dual problems of liquidity constraints and piling inventories.
Rising inflation and limited job opportunities only aggravate this financial crunch problem and add a spanner in the works. Even as this impact is observed across the spectrum, MSMEs and the agricultural sector face the brunt, given higher increases in input costs, production costs, logistical and inventory costs
Traditional measures to solve capital crunch
These issues have complicated the consistent need for funds by dealers, distributors, and other supply chain players, including vendors. Key structural initiatives and solutions are required to ensure the expected cash flow for these segments. This can only be done by understanding the current measures undertaken by the dealers and distributors to raise money. These funds are used mainly for fulfilling immediate business needs, such as paying the suppliers and buying the materials. The cash credit and overdraft are used for managing the day-to-day activities such as paying salaries and wages of employees and labour, stationary, bill payments and other miscellaneous overhead items. The majority of cash credit and overdrafts are fully collateralised.
How can supply chain financing help?
Although the supply chain finance revolution has benefited financiers, suppliers, and buyers equally, there is still a dilemma because, up until now, the SCF ecosystem has catered to corporations, large firms, and companies with large order books. However, as we can see, the real opportunity resides in funding the credit requirements of startups, MSMEs, and small firms who continue to struggle with loan deficits that stunt their growth.
SCF can significantly increase financing efficiency while lowering expenses and reducing risk. Supply Chain Finance does not necessarily need collateral, and most banks offer supply chain finance. However, the time taken to get the fund is between 15 to 30 days and sometimes even longer. The due diligence and other processes increase the duration of getting the required financial support, especially in tier 2 and tier 3 markets making timely access to funds a bigger challenge.
These distribution partners can quickly and easily leverage the potential of supply chain finance through tech-enabled platforms. These new-age platforms aid in the discovery of potential borrowers and lenders for SCF and support the entire process digitally by providing necessary data and information for prompt disbursements of required funds. Distributors/Suppliers benefit from timely financing leading to business continuity and scale-up. In fact, digitally driven supply chain finance further helps register high growth as more partners from remote areas are turning towards it to fulfilling their cash flow and working capital requirements.
Future outlook of the segment
Supply chain finance is poised to take the asset class market by storm because of strong demand, an uncorrelated yield, and banks making room for institutional investors. Supply chain finance is a highly sought-after investment mode for people who seek sustainable growth and profits and do not want to confine themselves to the stock or debt market since it is a clear, transparent, low-risk, and organised type of investment.
While India’s path to supply chain financing may be lengthy, technology-driven platforms are strengthening the startup and MSME ecosystems by allowing financiers and investors to invest in these firms’ supply chains. Supply chain finance technologies will form the backbone of supply chain finance as an investable & reliable asset class in the coming years.