Supply chain finance gaining traction over documentary trade

1. Supply chain finance gaining traction over documentary trade There has been much concern over the years about the anticipated rise of supply chain financing at a rate faster than that of documentary trade. The CAGR for supply chain financing is predicted to surpass 25% between 2019 and 2024, compared to 1-2% for documentary business. Several signs happened before the global Covid epidemic. Because of the significant obstacles experienced and the options available, the pandemic has accelerated the speed of supply chain digitization and the use of supply chain financing. Notwithstanding the fact that documentary commerce accounts for more than half of global trade and supply chain financing turnover, we may confidently predict that it will coexist for some time. Trade and supply chain finance provide creative solutions to the working cash gap that many expanding businesses encounter. They may help firms realise their full potential by increasing cash flows, providing financing, shortening the end-to-end trade cycle, boosting financial ratios, and avoiding counterparty and other risks in cross-border transactions. The evolution of trade finance Trade finance is the organisation of financing for commerce, whether domestic or international. The participants engaged in a typical trade finance transaction include buyers, sellers, and banks. Trade finance has evolved in tandem with the transformation of society and the advancement of the global economy. Traditional Trade vs Supply Chain Finance Transaction structures will primarily focus on the buyer's or supplier's entitlement to receive payments on an open account. These transactions also include risk reduction, which is accomplished via the application of different controls. Around 90% of trade transactions are completed on open account terms, allowing supply chain financing to expand. Supply chain finance, on the other hand, is a flow-based financing strategy in which banks have a smaller role in the operations. The funding is based on agreements, representations, and warranties between the transaction's participants.

2. Transaction structures will primarily focus on the buyer's or supplier's entitlement to receive payments on an open account. Risk mitigation is also a characteristic of these transactions, which is accomplished by the installation of various controls such as risk- sharing, risk transfer, or the inclusion of third parties in the transaction flow/financing structure. Typically, clients will share transaction data with banks in order to receive funding, which will be done in bulk depending on the data. Challenges in documentary trade The forms of documentary commerce, by definition, make it impossible to monitor transactions in today's fast-paced globalised commercial world. To define the difficulties encountered in documentary commerce, we must first comprehend the expectations of an importer and exporter, which ultimately come down to: 1.Arrangement of early payment for exporters 2.Security/guarantee of the quality of goods/services 3.The management of complex documents Supply chain finance—An alternative to documentary trade Documentary trade is usually adopted when buyers and sellers do not know each other nor do they trust each other. Supply chain finance is adopted when buyers and suppliers have established relationships as they have operated in the same ecosystem for a period of time. Companies in the information age often do not compete against one another; rather, networks compete to achieve maximum efficiency and effectiveness across the supply chain. 1.Change the emphasis from individual transactions to the overall network consequence. 2.Tailor and bundle customer-relevant solutions through ongoing digital banking innovation. 3.Provide solutions for exporters or sellers to get payment by reducing the risks of importers or buyers through an intermediate institution that secures credit based on the buyers' or themselves' creditworthiness. This necessitates increased client due diligence and KYC standards, as well as compliance with anti-money laundering laws. The solution should also include the future assurance of the payment from the buyer's side.

3. 4.The buyer can obtain credit and pay the financier later, allowing for early payment to the seller. Collaboration Is Key Supply chain finance works best when the buyer and seller have a long history of doing business together. Both sides are eager to collaborate and work together since it is advantageous to have longer time to pay off the debt and keep the money coming. It promotes goodwill and resilience, which benefits the whole supply chain. Supply chain financing is an economical financing strategy that lowers an MSME's reliance on informal financial sources. As technology advances, the finance procedures are becoming more simplified from start to finish. Each party gets real-time access to bank statements, GST, and e-invoices. Such openness facilitates the teamwork necessary for such a relationship. Supply Chain Finance cope with Digital Disruption The banking business is experiencing significant digital change, and customer expectations are growing. FinTech's are assisting the banking industry in meeting demand. In terms of supply chain finance, the banking industry has been technologically richer than conventional trade finance. Furthermore, because supply chain finance is flow-based and financing is dependent on data shared between multiple parties participating in the transactions, it may be claimed that it is simpler to digitise. Additionally, improved advances in the supply chain space are available. Yet, the traditional commerce space is entering a period in which stakeholders are attempting to feel at ease with the digital solutions provided by various fintech organizations. Since traditional commerce involves manual paperwork, digitising documents as well as issuing and transferring them digitally are significant problems for the traditional trade arena. Conclusion Supply chain finance is a flow-based financing strategy in which banks have a smaller role. It focuses on the buyer's or supplier's entitlement to receive payments on an open account and risk mitigation. It requires increased client due diligence and KYC standards, as well as compliance with anti-money laundering laws. Challenges in documentary trade include the arrangement of early payment for exporters,

4. security/guarantee of the quality of goods/services, and management of complex documents. Collaboration is key. Supply chain finance is an economical financing strategy that lowers an MSME's reliance on informal financial sources. It works best when the buyer and seller have a long history of doing business together and have real-time access to bank statements, GST, and e-invoices. Fintechs are assisting the banking industry in meeting demand, and supply chain finance is technologically richer than conventional trade finance. However, traditional commerce involves manual paperwork and digitising documents is difficult.