It isn’t news anymore that blockchain is beneficial to a multitude of industries. It is evolving (some would debate – has evolved) the landscape of payments and settlements in the financial sector. It seems to also be having an impact in other parts of finance like insurance, wealth management and loans. One very interesting application of blockchain in this space is Supply Chain financing. This is especially intriguing because Supply Chain financing forms a part of Supply Chain Management which itself seems to be going through big changes.
What is the problem with the current supply chain financing process?
The status quo when it comes to the process of supply chain financing is held back because of the manual work required as well as the inefficiencies at various stages of the process. In the process of Vendor Financing, the process is centred around the invoice which is generated by the seller and is ratified by the buyer. This invoice is then submitted to the lender for discounting. Owing to the involvement of multiple parties, each having its own independent database, the possibility of fraudulent invoices and double spending of invoices goes up drastically.
In Vendor Financing, the lender pays the Seller against the invoice while the repayments are taken from the Buyer. This is currently an offline process and this increases the possibility of delayed or missed payments. In addition to this, the Buyer will sometimes take a very long time to ratify the invoice and this will lead to delayed financing to the Seller. This will lead to increased cost pressure to the Seller.
How can Blockchain help supply chain financing?
Blockchain and Smart Contracts can bring order to the current supply chain processes.
- Blockchain will lead to all critical information like invoices, GRN, etc. to be accessible to all relevant entities in real time. This is done by writing the required code into the blockchain which serves to centralise the ledger.
- The issuance of payment to the Seller and repayment back from the buyer can be automated with the help of Smart Contracts which would automatically be triggered based on pre-agreed upon conditions.
- Service Level Agreements can be coded onto the Blockchain in the form of Smart Contracts to decrease the inefficiencies at different points which would lead to timely financing to the Seller.
It is, therefore, clear that Blockchain would help both Buyer and Seller to effectively manage their requirements for working capital in addition to helping the lender in their aim to eliminate fraud and double spending related to invoices.