Supply Chain Financing Vs Bank Loan: What’s The Difference?
Because of the volatile business and economic climate we are experiencing at this age of economic development, companies are refocusing their efforts into liquidity management and solidifying their balance sheets as preparation for any drastic change in economic development.
According to the World Supply Chain Finance Report 2018, “Further worries about future international trading relationships and disruption to international supply chains has meant some companies are stockpiling inventory to meet demand in case there are difficulties later. Holding increased inventory puts a strain on working capital funding and cash flow.”
Scarcity of liquidity, strict government regulations, and economic downturns are pushing companies to find better and more improved ways to manage their working capital. But with traditional financial methods still being widely-practiced in many global economies, liquidity and asset management becomes very difficult, forcing many companies to apply for bank loans as a way to remain liquid and operational.
But getting a bank loan is hurtful for the company’s balance sheet because it adds another liability account that the company has to pay later. It becomes a setback for the company’s growth by using revenues to pay off obligations instead of using it for future expansion. This, of course, is one of the main differences between bank loans and Supply Chain Financing (SCF). Below we talk more about the differences of bank loans and SCFs:
- SCF Does Not Create A Liability
Unlike bank loans, SCFs don’t add any negative entry in the balance sheet. This is because Supply Chain Financing institutions leverage on the buyer’s accounts payables and do not add any financial debt to the buyer’s or supplier’s balance sheet.
This means that the buyer’s payment obligation in the invoice shifts from supplier to the financial institution. Since they are obligated to pay the invoice already, there are no additional liabilities generated, unlike when getting a loan in the bank.
- Bank loans have big interest rates
One of the biggest downside of getting a bank loan is the big interest that comes along with the loan. Depending on the loan amount, most bank loans will have a bulky interest that would make it hard for MMEs or small businesses to pay off.
Under an SCF programme, however, suppliers who want to get paid earlier will have access to funds at interest rates that are linked to the creditworthiness of the buyer. So interest rates are not as demanding and stringent as banks.
“For suppliers, access to early settlements at preferential rates can be an attractive form of finance, provided it’s uncomplicated compared to other options available.” Says Kevin Day, CEO of HPD Software in the report.
- SCF Payment terms can be adjusted
One of the biggest advantages of being in an SCF programme is that payment terms with the financial institution can be adjusted, giving buyers ample time to pay off the invoice while satisfying the supplier with their payment.
Citibank’s “Benefits Beyond Treasury: How Supply Chain Finance Impacts the Bottom Line” report found out that this has a positive effect on both buyer and supplier:
“By extending the buyer’s payment terms from 60 to 90 days, it shows the resulting free cash flow for the company as well as the potential savings to the supplier, based on the supplier’s current cost of financing.” The report states.
In a time where economic downturns can happen at any minute and liquidity management is a top concern, getting a bank loan is a bad idea for many MMEs and start-up firms. So alternative financing solutions are important for these firms.
Thanks to the advancements of fintech and devices globally, Supply Chain Financing has become one of the best alternatives to bank loans and can deliver even faster results without damaging the balance sheets. It makes liquidity management easy and planning for future growth possible for MMEs and small firms.