A brief look at Supply Chain Financing

A brief look at Supply Chain Financing

When it comes to financing, we all have our scepticisms. Understanding the core concept of finance – and then the whole chains of links that follow – can be a bit overwhelming for an average Joe. In this blog, however, we won’t go deep into how finance works and what makes it one of the most crucial concepts in the world. But, for those of you with a slightly weak concept of Supply Chain Financing, we’re going to take a good look at the concept. As an added bonus, we’re also excited to discuss how the Supply Chain processes can be automated with the help of sofoCap, our in-house developed programme that does the magic for you.

What does it mean?

Supply chain finance – or commonly referred to as SCF – can be described as a set of technology-based solutions with a motto of reducing the financial costs along with the benefit of improving the overall business efficiency for both the buyers and sellers that are linked in the same sales transaction. These supply chain finance solutions can be employed in a number of ways. The most common methodologies work by implementing automating transactions and allowing it to make track of the approved invoices and settlement process. The whole process is monitored via SCF from its initiation to completion. In easier words, this means the buyers, in agreement with the suppliers, approve the supplier’s invoices in order to finance it, either from a bank or an outsider.
All in all, SCF takes advantages of all the people involved in a transaction, and, in return, it also offers several distinct advantages to all the participants as well. To break it down for you, the suppliers easily get the money they have leveraged. This happens rather quickly as well. Moreover, the buyers, on the other hand, get a relatively long time to pay off their dues. Therefore, supply chain finance providers are very well known for the fact that implementing it in a transaction makes for a profitable situation for all the participants. After all, supply chain finance leverages a short-term credit to the buyers and sellers that optimize their working capital. On top of that, it is also ensured that the seller has a comparatively lower credit rating than the buyer, which then makes it all the more easier to access the capital at a respective price.

How does it work?

As mentioned right above, typical supply chain finance solutions work their best in the case when the seller has a lower credit rating as opposed to the buyer. This essentially means that the buyer can easily take capital from any financial authority at a respectable cost. It also lets the buyers negotiate at a better term from the seller, resulting in extended payment schedules.
The whole idea behind supply chain finance is to encourage a sort of collaboration and a relation between the buyer and the seller. Not only does that allow them to be cohesive to one another, but also it makes both the parties less competitive to one another, which is not normally the case in a standard transaction. Simply said, in a normal transaction scenario, a seller would want to be paid as soon as possible while a buyer, on the other hand, would most likely delay the seller’s payment. A typical supply chain finance solution provider must ensure that the whole process is carried out in a flawless manner and all the participants are benefited one way or the other.

Things to know about supply chain finance

Supply chain finance, also at times referred to as ‘supplier finance’ or ‘reverse factoring’, while being an absolute necessity for a modern transaction, comes with its own sets of regulations. Of first, despite a common belief, it does not necessarily require a bank. After all, the whole automation in supply chain process is as transparent and safe as it could be, so there’s no need for a financial institution to step in and impose itself as a middleman creating even more complications. Since it’s executed automatically, it also kills the possibility of any errors that could have been the case with a human involvement.

Moreover, it does not come across as a mode of financial debt or a loan. This is due to the fact that SCF is an extension of the buyer’s account payable representing a true sale of their services and not financial debt. More importantly, in our opinion, the supply chain finance and blockchain technology is a very cost-effective solution, thanks to the elimination of common but hard processes like maintaining a trail of paperwork, reducing the risk of error, eliminating the overall need to keep a constant track of data for each invoice, and splitting up payables allowing the lenders to gain the possibility to purchase certain parts of invoices in order to reduce the risks.

What is sofoCap?

Our in-house solution, developed specifically to deal with all processes related to supply chain finance, is sofoCap. It is built using permitted protocol HyperLedger, and it’s built to encounter Blockchain in supply chain finance solutions as one of the most well-sorted solution mechanisms for solving supply chain finance issues globally.

The whole idea behind developing sofoCap was to ease up the whole process to an extent it makes sure the whole process is carried out without affecting the overall quality of the end result and even while eliminating the overall need of a middleman. Upon implementation, our programme works to create a supply chain ecosystem wherein the partners can easily trade with more transparency, automation, data availability, and, of course, less risk.
After all, as a proud developer of this technology, Sofocle is delighted to be amongst the top leaders working on Blockchain technologies across the globe. If you have any concern related to supply chain finance or sofoCap, feel free to get in touch with us.