How Blockchain Transforms the Supply Chain Finance

In this quick guide, explore how blockchain tackles the biggest pain points in supply chain financing and revamping today's intricate ecosystem.

What is Supply Chain Finance (SCF)?

Supply chain financing (SCF) is a set of techniques banks and financial companies use to manage the capital invested in the supply chain and reduce risk for all parties involved. SCF allows companies to improve their cash flow through various means, such as factoring, invoice discounting, and supplier financing. It is an efficient strategy for buyers, suppliers, and their clients to facilitate the financial and operational flow of the business.

Many companies offer a wide range of SCF solutions to assist their clients in extending payment terms and providing enough time for manufacturers to receive and make payments. Suppliers can receive payments early, and buyers can optimize their working capital.

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However, SCF has limitations. It is usually restricted to the most prominent suppliers, disadvantaging small businesses and start-ups. Some stakeholders have developed additional solutions to address this issue and improve supply chain efficiency. This includes using blockchain technology. Blockchain technology can help solve key challenges like facing trust in supply chain finance using decentralized, distributed ledger technology. 

As companies expand, they create new domestic and global ties to enhance their procurement process and find cheaper alternatives. While this positively affects accounting books, it can lead to short-term working capital problems, where valuable financial resources become locked into supply-chain requirements.

In recent years, there has been a growing trend of using cryptocurrencies to manage financial operations in supply chains. This is due to the need for transparent and secure transactions, which has expanded the global blockchain supply chain market. As of 2022, the market is valued at $1.47 billion and is anticipated to grow at a CAGR of 48.25 percent by 2032.

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Disadvantages of Traditional Supply Chain Finance (SCF)

Before diving into the blockchain revolution, understanding the pain points of traditional SCF methods is crucial. Here are a few major challenges businesses face:

• Slow and Laborious Approvals

Traditional SCF involves multiple approvals from various stakeholders, leading to delays and bottlenecks. Each approval requires document verification, further extending transaction times.

• Paperwork Overload

Reliance on paper-based documentation creates logistical nightmares. Physical documents are prone to errors, loss, and delays during transportation. Manual reconciliation is time-consuming and error-prone.

• Data Integrity Concerns

Traditional Supply Chain Finance often lacks a centralized, secure repository for transaction data. This vulnerability can lead to data manipulation, discrepancies, and disputes between trading partners.

These inefficiencies disrupt the smooth flow of goods and services, escalating operational costs, and hinder trust within the supply chain.

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Ways Blockchain Revolutionizes the Supply Chain Finance (SCF)

Increases authenticity in the supply chain

Supply chain finance is a vast network involving numerous stakeholders, including buyers, suppliers, intermediaries, etc. Unfortunately, the exchange of information in such a network is not always transparent, and different interest groups can prioritize their loyalty over others, leading to prolonged supply chain processes.

However, the introduction of blockchain technology can help eliminate this issue. All participants in a blockchain network have access to a distributed copy of the same ledger that displays shared information within the district. Since blockchains are immutable, they prevent misinformation, ensuring truthfulness and credibility within the network. It can help streamline survival strategies and the supply chain.

Moreover, blockchain's ability to create an unalterable chain of transactions helps build trust and confidence between the parties. Companies can use Blockchain to verify receipt of invoices and approve payments due.

Enhances inclusivity in the ecosystem

The supply chain financier system has numerous deficits, particularly when providing financial help to small and medium enterprises (SMEs). Sometimes, the leading suppliers are asked to fund the top 10 to 50 companies, whereas small and medium-sized businesses get left behind. This is unfair because smaller businesses may gain more by being offered early payments through supplier-led supply chain finance than larger companies.

Financial institutions are generally the financers in buyer-led supply chain finance. They make the invoice payments to the suppliers. Buyers repay them through a repayment plan consisting of the borrowed sum, a small fee, and interest.

Blockchain technology can assist this issue by leveling the playing field and encouraging access to banking funds. 

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Redefines financiers in the supply chain

Financial institutions are the suppliers in the buyer-supplier supply chain financing market. They pay suppliers on their behalf and send them a repayment schedule that includes the amount borrowed, an additional fee, and interest.

While financial institutions will play an important role in buyer-led supply chain finance, blockchain could open the door to various stakeholders in the system. Corporate foundations and individual investors may also participate in supply chain finance and earn investment returns. Platforms like CredSCF already use blockchain to allow different financiers to loan money.

Enhances the functioning of the supply chain

Making sense of economic data is often difficult when multiple parties are involved. Supply chain finance has suffered similarly to this one. Information inaccuracy is, in fact, one of the biggest contributing factors to why supply chain finance has struggled to solve long-standing supply chain issues.

In contrast, supply chain finance incorporating blockchain technology may help make the supply chain more efficient. The immutable and transparent ledger can maintain real-time information about moves and expenses, streamline financial resources, and facilitate more effective and smooth business operations.

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Conclusion

In conclusion, blockchain technology presents a revolutionary approach to supply chain finance (SCF). This translates to faster transactions, reduced costs, and increased trust among all participants in the supply chain ecosystem. As the technology matures and adoption grows, we can expect to see even more innovative applications emerge, shaping the future of financial operations in the global marketplace.

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