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Trading | January 31
What is Trade Finance ?

Cash flow is the lifeblood of a business – and managing cash flow is fundamental for the long term viability of any business, especially companies in the SME segment. Maintaining adequate liquidity at all times and at the same time it is important to focus on the cost of funds.

Traditionally, companies which are involved in cross border trade (exporters & importers)  Letter of Credit and Performance Guarantees from Banks is the primary source of financing Working Capital needs. Not many people are aware that companies involved in cross border trade can access alternate means of financing through AIF Funds and Export Finance corporations located in the various countries. In our series on “Trade Finance” we would be like to share how companies can benefit by availing funds through Supply chain finance  “SCF”

SCF offers a solution, as it provides a robust way of bridging the gap between incoming and outgoing payments. SCF is, in essence, a means of optimizing working capital and reducing supply chain risk.

SCF connects buyers, sellers and financial institutions onto one platform. This optimizes working capital for both buyers and suppliers; it helps buyers accelerate cash flow, and gives suppliers access to lower financing costs as well as providing visibility into outstanding customer invoices and timing of payment.

This has several benefits. For buyers it can improve financial metrics such as days payable outstanding (DPO), as well as freeing up cash that would otherwise be trapped in the financial supply chain – cash that can then be invested back into a business to fuel growth. For suppliers, SCF can mitigate the effect of payment term extensions and help accelerate their own cash flow.

For businesses operating on thin margins, the ability to improve cash flow without increasing debt can be invaluable – even multinational giants such as Nike and Volvo have reaped the benefits of SCF in recent years.

Supply Chain Finance - An elegant solution

Freeing up working capital is perhaps one of the best ways for a company to achieve growth, both by improving access to ready funds and by building stronger, healthier relationships with suppliers. These kinds of relationships, based on mutual trust and good will, can give businesses of all sizes a real competitive edge, not just when it comes to procurement, but at every stage of the supply chain.

To summarise, Supply Chain Financing, which could result in huge savings in cost of working capital which can be as high as 50% in certain cases. The initiators of it have to be the large companies and it helps in the growth of net sales. Implementing Supply Chain Financing also disproportionately benefits the smaller companies. However, if the large companies don’t do it, it raises the cost of financing so much, that it cripples the entire system.

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