In the last decade, supply chain financing has seen widespread adoption for its innumerable benefits of optimizing working capital for both buyers and sellers. Despite all the traction, supply chain financing remains restricted to the first-tier vendors and dealers of large corporates.
The real benefit of a supply chain finance program comes from providing a line of capital to dealers and distributors a level or two below the tier 1 customers. These are small businesses with limited access to capital to run their business. They are the weaker links of the supply chain that needs strengthening.
Today, the world’s trade finance gap is close to USD 1.3 trillion because most small and medium Enterprises (SMEs) across tiers 2 and 3 are largely neglected by lenders offering supply chain finance.
What is Tier 2 Funding or Retailer funding?
Retailer Funding essentially permits Tier 2 Distributors/Retailers access funds to procure inventory for reselling onward. Tier 2 supply chain partners hold a limited trade record or documentation for bankers to vet and are mostly cash starved. This funding gives them much-needed access to formal financing to reduce their cost of capital and enhance their growth prospects.
Why is it important?
One of the biggest reasons for small businesses not scaling up to their fullest potential is the unavailability of cash. Several companies are forced to play small due to a lack of capital to leverage larger business opportunities or take calculated risks. This limits several dealers and retailers in India. Their hands are tied constantly struggling to stay afloat to meet current business expenditures that growth becomes entirely out of the picture.
Retailer funding can solve this problem in more ways than one
Through this funding, the retailers are assured access to capital to buy the inventory needed to run their business. It allows them to reserve working capital in their hands to meet other operational expenditures as they don’t have to worry about allocating funds to the primary purpose of procuring inventory.
Secondly, consistent access to funds is crucial to stabilize the small businesses that form the foundation of every supply chain. SMEs with steady operations can then focus their attention on maximizing opportunities to pursue growth and expansion.
How can Retailer Funding strengthen the overall supply chain?
Tier 2 distributors and retailers are vital to maintaining the speed of distribution for leading anchors. Without a strong distribution arm, the growth of anchor companies may remain crippled.
Retailer funding can improve resilience across the supply chain ecosystem by strengthening the weakest link. Anchor companies can also benefit from increased visibility across supply chain stakeholders with better traceability and accountability.
With continued access to capital, these small businesses can grow to their full potential, indirectly improving the revenues and profitability of companies higher up in the supply chain.
Many small businesses currently rely on borrowing money from private lenders at significantly high costs. A formal supply chain finance that considers the risks and mitigations associated would prove a much cheaper alternative. This will help to bring down the cost of capital and improve the margin for retailers to stay invested in the business.
Over the years, banks have largely stayed away from the financing needs of the retailers. However, growing digitization and improved digital adoption across the country have created many FinTechs who have enabled financiers to speed up documentation, underwriting, and onboarding of these small businesses and democratize access to funds. Accessible, affordable, and timely access to capital can help SMEs fulfill their business ambitions, grow into newer markets, and enhance customer experience.
About the Author
Dean Menezes is the CEO of CMM Group and an angel investor in supply chain financing platform Cashinvoice. He has 27 years of experience in Consultancy, Financial Services and General management working at KPMG and ANZ Grindlays prior to joining the CMM Group. He is also on the Governing Board of the Goa Institute of Management and is the Honorary Consul of Germany in Goa. He has previously been Chairman of the Goa chapter of the Confederation of Indian Industries (CII) and is presently a Managing Committee member of Goa Chamber.