Myths and Facts About Supply Chain Financing

In today’s hyper-connected world, the supply chain is like the bloodstream of every business—nothing moves without it. But with the rise of the industrial internet of things (IIoT), cloud tech, smart factories, and all the other buzzword-heavy innovations, managing it has become a serious juggling act, specifically maintaining a healthy financing chain.

The game is changing fast, and keeping up with the pace in this era of digital everything and global business feels like you’re always one step behind. Complexity is the new norm, and businesses are feeling the pressure more than ever.

Figure 1:BCI Supply Chain Resilience Report 2023

A recent report highlights that different types of disruptions impact businesses in distinct ways. For example, 76.4% of respondents noted loss of productivity, while 77.6% faced financial losses and 73.8% suffered reputational damage from cybercrime and customer complaints resulting from these causes. Besides, Health and safety incidents typically affect all three areas, with 84.6% reporting increased cost of working.

Supply chain financing steps in as a crucial solution, providing companies with the liquidity and flexibility needed to weather these disruptions and maintain operational resilience.

Boosting Business Agility with Supply Chain Financing – Here’s How It Works

Supply chain finance, often referred to as reverse factoring, is a strategic financial solution that allows buyers and suppliers to optimize their cash flow. In this arrangement, a third-party lender facilitates early payments to suppliers, helping them access working capital more quickly.

Typically,  buyers prefer to delay payments as long as possible, extending payment terms to optimize their own cash flow. On the flip side, suppliers need cash sooner to keep their operations running smoothly. Supply chain finance bridges this gap by allowing suppliers to receive early payments while buyers can pay back the lender later, based on agreed-upon terms. This arrangement helps improve cash flow for both parties, making the entire supply chain more efficient.

Here are 3 common misconceptions that must be addressed to fully unlock the benefits of Supply Chain Financing

Myth 1: Only large companies benefit from Supply Chain Financing (SCF), and banks are the sole providers.

Technological innovations and the rise of Fintech have transformed Supply Chain Financing (SCF), making it accessible to various industries, including manufacturing and services. Previously, banks were the sole providers of supply chain financing solutions, and access was limited, often favoring larger companies that accounted for over 60% of available credit.

In Malaysia, supply chain financing (SCF) has become an essential mechanism to support small and medium-sized enterprises (SMEs). But unfortunately in the ASEAN region, which includes Malaysia, Indonesia, Singapore, the Philippines, and Thailand, fewer than 60% of SMEs have sufficient access to bank loans. This results in around 50% of these businesses being underserved or completely lacking SME financing support from banks​

Fintechs have simplified supply chain financing, allowing more suppliers to join and giving small businesses access to affordable credit.

Myth 2: Supply Chain Financing extends payment terms.

This myth is easy to clarify. Supply Chain Financing (SCF) doesn’t change the original payment terms; instead, it offers more flexibility for suppliers. Here’s how it works: Company A (the buyer) and Company B (the supplier) agree on a set payment term. Supply chain financing allows Company B to receive early payment from a third-party financier before the due date. Meanwhile, Company A sticks to the original payment terms and settles the bill with the third party later. This arrangement enhances cash flow flexibility without altering the initial agreement between the buyer and supplier.

Global supply chain finance (SCF) volumes have risen by 21% year-on-year, while funds in use increased by 20%. This growth, highlighted in BCR Publishing’s World Supply Chain Report 2023, is driven by strong expansion in regions such as Asia and Africa, where volumes surged by 28% and 39%, respectively. This growth, driven by the demand for early payments and rising inflation, highlights supply chain financing’s role in supplying liquidity to vendors while enabling buyers to extend payment terms without straining supplier relations.

Myth 3: SCF increases the cost of financing.

In reality, Supply Chain Financing (SCF) has proven to reduce the cost of financing for small and mid-sized suppliers. With supply chain financing, suppliers can often secure financing at lower rates compared to traditional loans, especially when supported by a reputable buyer’s credit rating. This is crucial in a market where borrowing costs are increasing. Supply chain financing programs can provide suppliers with discounting options that are more favorable, allowing them to manage cash flow more effectively​.

In July 2022, U.S. inflation surged to 9.1%, the highest in 40 years, with similar spikes globally. These pressures pushed suppliers to seek early payments as the value of money declined. Meanwhile, rising interest rates made borrowing more costly, leading small and mid-sized suppliers to turn to Supply Chain Financing (SCF) as a more affordable alternative to traditional debt. 

Figure 2: Supply Chain Finance global volume

Supply chain financing’s flexibility and liquidity have made it an attractive option, especially during times of inflation and economic uncertainty. In 2022, its global acceptance surged, with SCF volumes spiking to $2,189 billion(RM10.46 trillion) up from $1,803 billion(RM8.62 trillion) in 2021, reflecting its growing importance for businesses worldwide.

The Bottom Line

In a rapidly evolving financial landscape shaped by inflation and rising interest rates, Supply Chain Financing (SCF) is proving to be an essential tool for businesses. Offering flexible, low-cost liquidity solutions, Supply Chain Financing empowers suppliers and buyers to navigate economic challenges without compromising their financial health. As traditional financing becomes more expensive, Supply Chain Financing’s ability to bridge the gap is crucial for maintaining smooth operations and fostering growth, especially for small and mid-sized enterprises.

Want to boost your business with Supply Chain Financing in Malaysia? Explore how Supply Chain Financing can enhance your financial strategy today!

Interested to learn more about our SME Financing Options?

*This article is not meant to recommend CapBay products or be used as a tool to make any investment or financial decisions. Product recommendations must be independently evaluated before you invest. Any product recommendation by CapBay must not be regarded as financial planning or financial advice.