In the past few years, the rise of innumerable smaller businesses has brought revolutionary changes within the supply chain finance offered by ICICI bank and the overall Supply Chain Finance mechanism. Businesses regularly look for ways to increase their operational efficiency and improve profits, and one that allows them to have access to their requisite products/services with the flexibility to make payments later is called supply chain finance as offered by ICICI bank or other financial institutions. Specially under circumstances when they do not have adequate means for upfront payments.

Thus, supply chain finance offered by ICICI bank is a crucial tool which encourages business collaboration helping businesses to achieve their maximum potential of their supply chains, and promotes sustainable growth. It is a financing tool that avoids bottle necks in the entire supply chain due to financial crunch by one supply chain member. Supply chain finance also allows access to funding from lenders like ICICI Bank who would otherwise not be able to finance a business due to credit score or other issues. Read further to find out more about the concept of supply chain finance, its purpose, types, benefits, drawbacks, alternative financing options, and more. Keep reading to find more answers.

Supply Chain Finance by ICICI Bank -Meaning and Purpose

Supply chain finance (also referred to as reverse factoring) offered by ICICI bank, implies unique financing solutions for businesses where the supplier and the buyer are linked within the same chain of transaction, helping effective cash management through prior payments to the suppliers and extending terms of payment for the client in the transaction.

Supply chain finance solutions by ICICI bank entail short-term financing solutions resulting in quick access to money for the suppliers or lenders. They extend payment duration for the buyer while also assisting them to optimize their day-to-day fund requirements and smooth running of business functions, resulting in a win-win situation for the parties.

Types of Supply Chain Finance Offered by ICICI Bank

Vendor Finance by ICICI Bank

Vendor financing, also known as trade credit or supplier financing, could be understood as lending of funds from a vendor to the customer. The customer will then use the funds to purchase goods or services from the concerned vendor itself. It takes the form of a deferred loan with interest payments till a predefined date, usually for customers with inadequate cash flows or working capital not usually considered by conventional institutions like banks etc. The vendor may involve a bank like ICICI Bank, by obtaining credit in the form of working capital loan or bill discounting, etc. The ICICI bank generally looks at confirmed orders before extending this credit.

Pros of Vendor Financing by ICICI Bank

• Vendor financing is a type of supply chain finance that can help boost revenues and help the business run smoothly and successfully.
• Helps build vendor-buyer relationships, causing mutual benefits for parties; serving their long term interest and cooperation.
• Borrowing from other sources helps businesses to seek funds for specific capital-intensive activities.

Cons of Vendor Financing by ICICI Bank

• Vendor financing may also attract a higher rate of interest compared to other financing sources.
• Typically, vendor finance has limited capital to offer made available provided by the vendor rather than a financial institution.
• Since every unique vendor has its own terms, it is not possible to get guaranteed capital from multiple suppliers in a single deal.

Dealer Finance by ICICI Bank

Dealer financing is a type of supply chain finance facility extended by a retailer/dealer to his customers with such loans being sold to a financial institution. Next, a financial institution purchases such loans from the retailer at discounted value and then collects interests and principal repayments until such a loan is matured. Simply put, in this type of financing, the dealer takes the loan from the ICICI bank on behalf of his customers. This gives the retailer quick access to cash without having to wait for the loan to mature. Dealers charge higher interest to be profitable. While the ICICI bank or other banks involved gets more business and fees.  It is a win-win for all parties involved.

Pros of Dealer Financing by ICICI Bank

• Dealer financing is a type of supply chain finance that enables easier and quicker access to funds rather than the conventional sources and lengthy paperwork.
• Eliminates the need to personally visit the financial institution or go through the lengthy process of application submission and approval;
• Access to even borrowers without good credit scores or poor credit histories.

Cons of Dealer Financing by ICICI Bank

• Dealers levy a higher markup on purchase rates as compared to ICICI bank or other lenders or financial institutions, leading to dealer financing being costlier than those by financial institutions like ICICI bank.
• Since the dealer’s lending network is limited, customers have limited choice in terms of financing options.

Factoring Finance by ICICI Bank

Factoring finance could be defined as a financial arrangement between a business and a financial institution like ICICI Bank, where the prior agrees to trade its receivables at discounted value to the financial institution leading immediate liquidity for business needs without any waiting period. Furthermore, the financial institution, like ICICI Bank, purchases the invoice from businesses at discounted value to receive the full amount from the debtor. This type of supply chain finance enables easier and quicker access to funds rather than the conventional sources and lengthy paperwork.

Pros of Factor Finance by ICICI Bank

• Factoring finance is a type of supply chain finance that significantly reduces cash collection period, enabling immediate cash realization through the sale of invoices to banks like ICICI banks.
• Advances made by ICICI bank under factoring finance depend upon invoice strength and creditworthiness and not factors such as collateral which is advantageous for small scale business units and start-ups.

Cons of Factor Finance by ICICI Bank

• In case of a smaller number of numerous invoices, factoring finance could be costlier than alternative financing sources, as the processing fee and time increases.
• The advances made under factoring usually carry a higher rate of interest than usually charged by traditional institutions.

Reverse Factoring by ICICI Bank

Another type of supply chain finance is reverse factoring, that could be defined as a financial arrangement initiated by a buyer that facilitates early payment to the supplier by selling invoices at discount to the lenders like ICICI Bank, on one side while affording extended duration for the buyer for repayment.

Pros of Reverse Factoring by ICICI Bank

• Reverse factoring enables supplier access to early payment which enhances business working capital and fulfils their financial obligations timely. Supporting cash flows for smaller suppliers and keeping them in business.
• Depending on the creditworthiness of the buyer, this type of supply chain finance could be accessed at lower rates from ICICI Bank, compared to traditional factoring.

Cons of Reverse Factoring by ICICI Bank

• Buyer incurs costs related to interest payments which could affect his profit margins;
• If a business is already under heavy debt burden, utilizing reverse factoring might put further strain on their business.

Purchase Order Financing by ICICI Bank

Purchase order financing is a short-term financing arrangement sought by the seller to cover the cost of producing goods or purchasing goods already sold to the customers through a purchase order to ensure they have adequate resources to deliver goods within the agreed period. This type of supply chain finance is specifically relevant for businesses looking to fulfil large orders while maintaining sturdy chain drift.

Pros of Purchase Order Financing by ICICI Bank

• Businesses could easily access funds via purchase order financing which have a flexible eligibility criterion compared to traditional banks.
• This type of supply chain finance could help businesses to capitalize on larger purchase orders without having to worry about financial resources to complete them.

Cons of Purchase Order Financing by ICICI Bank

• Though there are no interest payments involved under purchase order financing, however it includes an upfront fee which may or may not be available to the seller.
• Over reliance on purchase order financing could affect customer relationships prompting customers to seek other solutions.

Inventory Financing by ICICI Bank

Inventory financing is a type of supply chain finance arrangement which enables the buyer to procure goods with the aim to sell them at a later date in future. Financial institutions, like ICICI bank, seek collateral by pledging the involved inventory to enable them access to credit facilities.

Pros of Inventory Financing by ICICI Bank

• Smaller businesses can seek funds without having to worry about their credit history or credit ratings.
• Inventory financing also saves from the hassle of pledging other business assets or personal assets of the business owners against payment security.

Cons of Inventory Financing by ICICI Bank

• Unlike other supply chain finance methods, the cost of borrowing from financial institutions like ICICI bank, for inventory financing, might be higher making it almost impossible for small-scale businesses and start-ups to make payments for fees and interest rates.
• In case of higher risk elements, the lending institution, like ICICI Bank, might not grant full value of inventory for loans, which may leave the businesses unsatisfied.

Export and Import Financing by ICICI Bank

Export-Import financing is a supply chain finance arrangement which extends financial resources to businesses to cover business costs such as operational costs, import financing assists businesses to manage cash inflows and facilitate supplier payments in foreign currencies. Hence involvement of banks like ICICI makes the transaction and associated risks easier.

Pros of Export and Import Financing by ICICI Bank

• Export and import financing allows businesses to gain access to new markets beyond national boundaries which ultimately increases scope for business growth.
• Negotiable instruments like Letter of Credit from ICICI banks act as a means to guarantee repayment on time and minimizing risk of non-payment for exporter or importer.

Cons of Export and Import Financing by ICICI Bank

• Businesses find the process challenging and time-consuming due to varied trade regulation, language barriers, and documentation requirements by the ICICI bank in this type of supply chain finance.
• Currency fluctuations might have a bearing on the profit margins which may cause financial uncertainty for the businesses.

Benefits of Supply Chain Finance Offered by ICICI Bank

Improved Cash Flow

One of the key advantages offered by supply chain finance includes improved cash flows for the supplier as well as the buyer, as the system enables early funds access to the supplier while it extends the period of repayment for the buyer in the entire supply chain transaction. It helps businesses to manage operations smoothly without any cash flow constraints and better working capital management through the intervention of lending institutions like ICICI bank.

Encourages trust and a collaborative spirit

Supply chain finance mitigates the risk of payment default by ensuring timely payments to suppliers and encourages collaboration between parties, leading to negotiation of terms resulting in better pricing, improved delivery periods, and increased trust and cooperation, creating a win-win situation for both the parties involved. It also enhances business opportunities for financial institutions like ICICI banks who get more fee and charges.

Reduced Financial Risks

Supply chain finance also comes with the advantage of risk mitigation within the supply chain transaction. Proper implementation of supply chain finance helps businesses to cut down the effect of disruption within the supply chain due to reasons such as delayed payments or non-delivery of products, etc., which helps to ensure a stable supply chain that minimizes typical risk of customer dissatisfaction and operational instabilities.

Cost Savings

Optimizing supply chain finance processes and streamlining payment flows helps businesses to reduce administrative costs and expand operational competence by optimizing the supply chain process and streamlining processes. Discounted invoice value for early payments, by ICICI Bank, could further save costs, enhancing finances for the businesses in the supply chain.

Lower cost of funding

Unlike traditional financing sources by ICICI Bank, supply chain finance (SCF) may offer more cost-effective financing options, making it easier for certain businesses who otherwise face higher costs of financing. For instance, the interest rate charged by a traditional financial institution would be much higher than the certain fee levied by a supply chain financier like ICICI Bank. Not only this, availing loan facilities might have an adverse effect on crucial metrics such as debt-to-equity ratio and other metrics, whereas supply chain finance only means a true sale of receivables with no bearing on the financial health of the supplier.

Fuels growth and innovation

Supply chain finance offers access to working capital and better cash flow management. With this the parties involved could

• cater to bigger demands for their products/services,
• invest more energy and resources in innovations that will offer a competitive gain over their rivals,
• create strategies to fare among the competition, and
• adapt themselves to rapidly changing market trends.

Drawbacks of Supply Chain Finance 

Could mean over reliance on suppliers 

Since supply chain finance tends to work on close cooperation between the buyer and supplier, it could significantly increase the buyer’s dependence on a limited number of suppliers, which is not an issue unless the supplier runs into issues such as business losses, operational instabilities, or order approvals without production fulfilment, which could put the buyer in a risk.

Could imply more complexity in a transaction 

Though a standard supply agreement contains only two parties the supplier and the buyer however a supply chain finance transaction entails a third party, the financier – like ICICI Bank who ensures seamless coordination between buyer to fund the agreement.

Could make a business more prone to cyber security risks.

Supply chain finance transaction relies heavily on tech platforms made available by financiers like ICICI Bank, which makes it prone to cyber security risks such as data leakage, technical glitches, server problems, cyber-attacks, etc. which poses a significant threat and systematic failure to manage supply chain operations.

Limited Applicability 

Despite all its advantages the primary demerit of Supply chain finance lies in limited applicability as it would be appropriate for certain transactions or certain industries depending upon the unique aspects of the supply chain ecosystem. Furthermore, the availability of funds is restricted to the value of receivables, and any enhancement of credit facility shall depend upon the buyer’s credit rating with the ICICI bank.

Financing Options Alternate to Supply Chain Finance Offered by ICICI Bank and Other Sources

There are various financing options other than supply chain finance depending on the nature of work, tenure, frequency and volume of credit required, credit worthiness of the client and other factors. Here we will take a quick look at the alternatives to supply chain finance that are available to the businesses.

Angel Investors- 

Businesses in early business stages may seek finance from individual investors or a group of investors known as Angel investors who support businesses to set up business units which may either be offered as a debt or for a certain percentage of ownership stake in the business. Apart from fulfilling capital requirements, they could also bring expertise in handling business operations, handling management functions, product development or expansion. These are especially relevant for entrepreneurs or businesses who are unable to secure business debt through traditional sources.

Venture Capital funds- 

Businesses who are either in the early stages of their growth cycle or witnessing significant growth could seek capital from venture capital funds. Venture funds are specialized institutions who finance businesses with a viable business model but lack access to bank loans from ICICI bank due to inadequate credit history. Not only this, they also support businesses through network access and expert guidance for the business to reach new avenues. 

Bank Guarantee by ICICI Bank– 

A ICICI bank guarantee could be defined as a guarantee of repayment extended to a third party, in this case the ICICI Bank, on behalf of their client where the client is unable to fulfil his contractual obligations as per their contract. In common parlance, bank guarantees from ICICI banks are generally lent by businesses to acquire essential supplies, purchase equipment or fulfil business operations. 

Letter of Credit by ICICI Bank–

Letter of Credit are issued by financial institutions like ICICI Bank, as an assurance of payment to the seller within due date in case the purchaser is unable to make payments for the purchase enabling the ICICI bank/financial institutions to repay either in part or full. Later, the financial institution could recover such a sum from the purchaser. Owing to factors such as distance, legislation and governing rules, difficulty in establishing trust and confidence among parties personally, letters of credit has become a crucial financing solution especially in international transactions ensuring minimal risk between buyer and seller parties.

Bank Loans by ICICI Bank– 

ICICI Bank Business loans are the most common financing solutions considered by businesses to fulfil their immediate business needs including handling day to day operations, enhancing production capacity or extend operations, incur marketing or promotion related costs, etc.  which either could be for short term or long-term requirement.

To more get in touch with experts at BankKeeping, or request a demo for reducing credit cost or getting more loans from same bank to be able to handle your day to day business operations successfully.

Dealer Finance vs Vendor Finance by ICICI Bank

	Dealer Finance	Vendor Finance
Meaning	Dealer financing is a type of supply chain finance arrangement between a retailer and a financial institution, like ICICI Bank, where the retailer initiates loan facility and sells the same to a financier. The customer then repays the debt along with interest and principal within the repayment period.	Vendor financing is a type of supply chain finance that could be understood as lending of funds from a vendor to the customer using the funds to purchase goods or services from the concerned vendor. Also known as Trade Credit.
Benefit	Dealer finance offers quick access to funds, better operational efficiency, inventory organization and improved working capital management.	Vendor financing helps vendors to gain customer trust and increase sales, it also helps customers to purchase goods without having to worry about collateral or not meeting the credit score criteria.
Applicability	Dealer financing does not take into account the credit history of the debtor, allowing access to funds to those even not considered by Conventional financing institutions or ICICI Bank for other types of loans.	It helps a vendor to make sales and build better customer relationships, it would help borrowers to secure goods/services without having to seek funding from external sources seeking collateral.

Factoring vs. Reverse Factoring by ICICI Bank

	Factoring by ICICI Bank	Reverse Factoring by ICICI Bank
Meaning & How does it work?	Invoice Factoring, is a type of supply chain finance that could be defined as financing facilities which allows businesses to sell their receivables to financial institutions like ICICI Bank, allowing them to receive payments for up to 80-90% of invoice value and remaining amount is repaid once the amount is paid by the purchaser.	Reverse Factoring is a type of supply chain finance that allows the supplier to receive payments early on through sale of invoice at discounted rate on one hand while extending duration for repayment for the purchaser.
Example	Where the company GY Exports sells raw materials to BY manufacturers for a sum of Rs. 70,000 with a payment due within a period of 90 days where the company GY exporters owe Rs. 35000 to their suppliers within 20 days. GY Exporters can sell their invoices to a factoring institution like ICICI Bank for up to 90% of the value i.e. 63000.	For instance, Company GY exports seek 90 % financing from financial institution like ICICI bank, i.e. Rs. 63000/- Thus, the financial institution or ICICI Bank, makes payments to GY exports and allows more time to BY manufacturers to repay debt over a period.
Costs	Due to the higher risk of default, financiers like ICICI Bank, levy a certain percentage as a fee and interest payments to make payments in advance against invoice value.	Since the invoices usually belong to larger corporations, the risk quotient is lower, resulting in lower fee charges by the ICICI Bank or other financial institutions.
Who initiates payment	Seller initiates the payment in factoring transactions.	Buyer initiates payment in reverse payment transaction.
Risks	The business that sells its invoices to a factoring company, like ICICI Bank, has more risk than the factoring company. The business is responsible for the risk of non-payment by customers	In reverse factoring, the liability of the lending institution, like ICICI Bank, is dependent on the buyer.

Conclusion

Therefore, in the recent years, supply chain finance has become a game-changing phenomenon among businesses globally, leading to revolutionary changes in operations management for businesses. With benefits such as efficient working capital management, risk mitigation during instabilities, encouraging collaboration and fostering trust and confidence among parties involved – buyer, seller and the bank, in this case ICICI bank. It has made it a crucial device for businesses in quest of sustained growth among rising innovation and competitive spheres.

As a financing arrangement, supply chain finance is anticipated to advance, deriving growth and prosperity for businesses worldwide. In the years to come, businesses that are able to leverage this tool will be in a much better position to grow their operations and expand their reach globally.