Micro, Small and Medium Enterprises (MSMEs) contribute nearly 30% to India’s Gross Domestic Product and generate employment for approximately 100 million people in India. MSMEs lay a solid foundation for India’s economic development and are a significant source of innovation and progress. Access to adequate finance is critical for the survival and growth of MSMEs. However, financial institutions restrict their exposure to MSMEs because of the high cost of servicing and the risk of lending without sufficient collateral.
Supply chain financing (SCF) plays a crucial role in bridging the financial gap to revitalise MSMEs and provide much-needed liquidity. Through SCF, financiers like Tata Capital provide early payment solutions to MSME sellers by discounting their invoices while enabling buyers to optimise their working capital.
Here are some ways in which supply chain financing is bridging the financial gap for MSMEs in India:
Timely access to capital
Supply chain financing provides early payment solutions to MSMEs and immediately fulfils the demand for working capital. With the onset of technologies and ERP integration, once the SCF line is set up, the fund requirement is fulfilled within a few hours. MSMEs can utilise this money to maintain inventory levels, procure new raw materials, or expand their business operations.
Access to affordable means of finance on-demand is crucial for MSMEs to conduct uninterrupted business operations.
The government of India has launched a large number of MSME credit schemes, but it is a one time and non-recurrent access to liquidity. However, to meet daily expenses, MSMEs need to maintain a consistent flow of working capital.
Supply chain financing is based on monthly invoices, and it provides MSMEs with an opportunity to have sufficient cash to meet the working capital needs of the businesses periodically.
No burden of repayment
There is a significant difference in loan payment terms under credit guarantee schemes and supply chain financing. Under credit schemes, the rate of interest is lower. But borrowers need to repay the amount due within the stipulated timeframe.
However, it is not the same under supply chain financing. MSMEs have no repayment burden since it’s an advance against invoices due to MSME sellers. Financiers settle the payments by collecting directly from the buyers on the due date.
Cost-effective source of funds
SCF is an attractive option for MSME sellers as it can access low-cost financing. Lending institutions extend funds based on the buyer’s creditworthiness, supply chain relationship, and the vintage association between the buyer and seller.
It is a competitive source of finance compared to traditional forms of financing that promote better collaboration between the buyer and the seller. Buyers with a decent credit rating can negotiate better terms from the seller. In return, it accelerates MSMEs cash flows and strengthens sellers to contribute better in growing the buyer’s business.
SCF has existed for decades, but access to real-time data like bank statements, GST, and e-invoices has streamlined the end-to-end process with digital integration and technological advancements. Digitisation has improved the efficiency of the entire process and reduced the cost of supply chain finance.
With supply chain financing, MSMEs have easy access to finance at a lower cost, reducing their dependence on informal funding sources. It is a straightforward process with minimal documentation and allows borrowers to get funding at better terms from formal financial institutions.
Supply chain financing is an efficient financing alternative to meet the working capital needs of MSMEs. By offering easy access to credit, it accelerates the growth and development of MSMEs.
Tata Capital Corporate offers several small businesses quick access to capital through its supply chain financing solutions with tie-ups across leading corporate houses in India. Click here to know more about our supply chain financing offerings.
FAQs
What is the meaning of supply chain financing?
Supply chain financing is an arrangement where a buyer collaborates with a financial institution to pay suppliers on their behalf. While suppliers may need to join the program, the buyer is responsible for setting up the process.
Who should finance the supply chain?
In supply chain finance, the buyer takes the lead by involving a financier. The financier pays the supplier immediately, and the buyer repays the financier at a later date.
What are the top 10 supply chain finance companies in India?
The leading supply chain finance companies in India include KredX, TReDS, Drip Capital, M1xchange, Vayana Network, RXIL, Indifi, Capital Float, Invoice Bazaar, and CashInvoice. These firms offer solutions to enhance liquidity and streamline supply chain operations.
What is the difference between supply chain financing and inventory financing?
Supply chain financing focuses on strengthening supplier relationships and ensuring supplier cash flow, while inventory financing is specifically designed to fund the purchase and management of inventory. Businesses may use either or both depending on their requirements.
What is an example of supply chain financing?
An example of supply chain financing is when a retailer partners with a bank to pay its suppliers early, allowing the suppliers to receive their payments without waiting for the retailer’s payment terms to complete. The retailer then repays the bank later.
28 January 2025
4 mins read
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