Supply Chain Financing with Blockchain: Exploring the Benefits and Challenges

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Written by
Shivani Tripathi
Published on
March 28, 2023

Blockchain is a decentralized digital ledger technology that allows multiple parties to maintain a single, immutable, and transparent record of transactions without the need for intermediaries such as banks or other financial institutions. In simple terms, it is a distributed database that stores and verifies transactions on a network of computers.

Each block of the given blockchain network is made up of a set of transactions, and once a block is added to the chain, it is immutable in nature. This makes blockchain a highly secure and reliable way of storing and transferring data, as it is nearly impossible for any one party to manipulate or corrupt the system.

In this blog today, we are going to discuss the role of blockchain technology in supply chain financing

Introduction to Supply Chain Financing 

Supply chain financing, also known as “supplier finance” or “reverse factoring”, is a financing solution that allows companies to optimize their cash flow and improve the financial stability of their supply chain.

In a typical supply chain financing arrangement, a financial institution (such as a bank) provides funding to a buyer's suppliers based on the buyer's creditworthiness. This allows the suppliers to receive payment earlier than they would if they had to wait for the buyer's payment terms to be fulfilled. The financial institution pays the suppliers on behalf of the buyer and then collects payment from the buyer at a later date.

This type of financing can benefit all parties involved in the supply chain. Suppliers can receive payment more quickly and at a lower cost than they would from traditional financing options. At the same time, buyers can extend payment terms without negatively impacting their relationships with suppliers. Additionally, the financial institution providing the funding earns interest on the financing provided.

Blockchain technology can be a powerful tool for supply chain financing. It has the potential to streamline and secure transactions, increase transparency, and reduce costs. Spydra’s wide range of plug-and-play blockchain solutions is tailor-made to suit the needs of various industries such as supply chain and financial services. 

In traditional supply chain financing, a supplier may have to wait a long time to receive payment for goods or services rendered. This delay can be detrimental to the supplier's cash flow and ability to operate efficiently. With blockchain, the process can be expedited and made more secure.

How does Supply Chain Finance Work?

Supply chain finance is a financing method that helps businesses optimize their cash flow by improving the efficiency of their supply chain. It involves leveraging the creditworthiness of large companies to provide financing to smaller suppliers, who might not otherwise have access to affordable financing.

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The process typically works as follows:

  • A large company (the "buyer") enters into a contract with a supplier (the "seller") to purchase goods or services.

  • The seller delivers the goods or services to the buyer and invoices the buyer for payment.

  • The buyer approves the invoice and shares it with a financial institution (such as a bank or a supply chain finance platform).

  • The financial institution pays the seller the invoice amount (minus a discount or fee) before the payment due date.

  • The buyer repays the financial institution on the payment due date.

By using supply chain finance, the seller can receive payment faster, which improves their cash flow and allows them to pay their own suppliers more quickly. The buyer benefits from being able to negotiate better payment terms with their suppliers and potentially improving their relationships with them. The financial institution earns a fee for facilitating the transaction and assumes the credit risk associated with the transaction.

Blockchain for Supply Chain Financing 

Here's how it works:

  • The supplier and buyer agree to a contract and submit it to the blockchain.
  • The supplier delivers the goods or services to the buyer.
  • The buyer confirms receipt of the goods or services on the blockchain.
  • The blockchain automatically triggers a payment to the supplier based on the terms of the contract.
  • This process can be completed in real-time, reducing the time it takes for the supplier to receive payment. In addition, the use of blockchain provides a secure, tamper-proof ledger of all transactions, increasing transparency and reducing the risk of fraud.

Blockchain can also be used to create a more efficient supply chain by enabling the tracking of goods from the point of origin to the point of delivery. This can help to reduce the risk of counterfeit goods entering the supply chain and can also provide greater visibility into the supply chain, enabling businesses to make more informed decisions.

Explore the Key Challenges in Supply Chain Financing 

Some of the common and key challenges in supply chain financing are as follows:

  1. Lack of transparency: One of the major challenges in supply chain financing is the lack of transparency in the supply chain. This makes it difficult for financiers to assess the risks and provide financing to suppliers.
  2. Complexity: Supply chains can be very complex, involving multiple parties, products, and transactions. This complexity can make it difficult to manage and finance the supply chain effectively.
  3. Limited access to financing: Many suppliers in the supply chain are small and medium-sized enterprises (SMEs) that may not have access to traditional financing. This limits their ability to grow and expand their businesses.
  4. High transaction costs: The cost of financing transactions can be high, especially for smaller transactions. This can make it difficult for suppliers to obtain financing for small orders.
  5. Lack of collateral: Suppliers may not have sufficient collateral to secure financing, which makes it difficult for them to obtain financing.
  6. Risk management: Managing risk is a key challenge in supply chain financing. Financiers need to be able to assess the risks associated with financing a particular supplier and manage those risks effectively.
  7. Legal and regulatory issues: There may be legal and regulatory issues that need to be addressed in supply chain financing, which can make the process more complicated and time-consuming.

Benefits of Using Blockchain Technology in Supply Chain Financing

Blockchain technology has the potential to revolutionize supply chain financing by enabling secure, transparent, and efficient transactions. This technology also has the potential to deal with common challenges in supply chain financing. Here are some of the benefits of using blockchain in supply chain financing:

  1. Increased transparency: Blockchain technology provides a distributed ledger that allows all parties involved in a supply chain to have access to the same information in real time. This helps to increase transparency and reduce the risk of fraud, errors, and disputes.
  2. Enhanced security: Blockchain uses cryptographic algorithms to secure transactions, making it virtually impossible to tamper with or alter data once it has been recorded. This ensures that all parties have confidence in the validity and authenticity of the data.
  3. Reduced transaction costs: Blockchain eliminates the need for intermediaries, such as banks or other financial institutions, to facilitate transactions. This reduces transaction costs and speeds up the process.
  4. Faster transaction processing: Blockchain enables quicker and more efficient transactions by automating many of the manual processes involved in supply chain financings, such as documentation, verification, and approval.
  5. Improved liquidity: Blockchain enables suppliers to access financing more quickly and easily, which improves their cash flow and liquidity. This helps to reduce the risk of late payments, defaults, and other financial issues.

Final Words 

The use of blockchain technology in supply chain financing can streamline processes, reduce costs, and improve transparency and security. In this article, we learned about the everyday challenges of supply chain financing and the crucial role of blockchain technology in dealing with the same.

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