The pandemic didn’t spare anyone or anything, let alone complex financial systems in the global supply chain. The pre-pandemic era worked in a relatively predictable model when it came to finances in the supply chain — a buyer purchases goods from the seller with a standard credit term of about 30–45 days. However, the current scenario isn’t as flexible, which is where blockchain brings its immense potential to transform supply chain finance.
Sellers require payments faster to procure raw materials while buyers are in a cash crunch relying on further sales to clear purchase payments; it’s a vicious loop. This is where Supply Chain Financiers (SCF) come into play. Supply chain finance is a broad term referring to a financial solution that facilitates the reduction of cost and increased cash flow efficiency for both parties involved in a business transaction.
Buyers can defer the repayment of their dues to suppliers, thus, optimizing working capital and suppliers can receive payments early on to improve their cash flow position. The conventional centralized SCF information systems only automate the process to make it efficient in terms of time but they are not transparent and tamper-proof.
This comprehensive network of suppliers, distributors, financial institutions, insurance firms, inspection/audit firms, warehouses, logistics, custom agents, and transporters needs a trusted system to manage communication, exchange information, and cater to the financial needs of each entity. All signs naturally point towards blockchain tech as a solution.
Here’s a primer — blockchain is a shared, trusted ledger of transactions that anyone in a peer-to-peer network can inspect, but can only be modified by the consensus of all parties in the network. The ledger in a blockchain is immutable and is built using cryptography. This involves building a chain of successive digital blocks, each block containing transaction details such as date, time, dollar amount, participants’ information, and description.
The participants in the supply chain can leverage several features of a blockchain like distributed ledger, smart contracts, and tokenization to achieve the desired transparency, data security, and a trusted environment, all at a low cost.
Let’s break down how Smart Contracts (autonomous programs), in particular, improve the efficiency of supply chain finance. SCF transactions are secured through contracts, which are triggered at different stages such as purchase order issuance, invoice generation, invoice approval, payments, and settlement.
Here are some business benefits of Smart Contracts on blockchain-powered SCF systems:
- Smart contracts can be programmed to issue supplier invoice tokens and list them for trade as soon as approval is received from the respective buyer.
- Smart contracts can be programmed for the finance companies to bid and buy the invoice tokens in exchange for fiat/digital currency based on the pre-approved rates for the supplier or based on the credit score of the borrower by the finance companies on the network.
- Smart contracts can auto-debit a buyer/seller wallet or bank account as per the repayment schedule and payment instructions taken.
- Smart contracts can burn/destroy the tokens as soon as the buyer clears the payments on the due date or else the contract as programmed will start adding late payment charges for the elapsed time.
These mechanisms address the challenges of conventional supply chain finance by ensuring trust and maintaining transparency and integrity. In addition, participants will have complete visibility of the supply chain business events. Digital records will aid the automation of operational activities, and facilitate real-time collaborative decision-making on financing improving the overall efficiency of the value chain.
In these challenging times, when there is an immense focus on cost efficiency, working capital optimization, and operational efficiency in SCF, Blockchain can provide a truly disruptive solution.
At Kreatorverse, we’ve successfully used blockchain technology in the food supply chain, to create an ecosystem that is transparent, immutable, can be traced in real-time, and is secure.
“Trade or Supply Chain Finance industries are adopting emerging technologies to transform their systems to become more agile, efficient, transparent, and secure. Our team is actively working on assisting CxOs on this digital transformation to produce tangible benefits”, concludes Yuvaraj Thanikachalam, CEO at Kreatorverse.