Embedded loans in supply chain finance: How FMCG companies can benefit

Shamolie Oberoi   /    Content Marketing Specialist    /    2021-09-20


Supply chains, especially in emerging markets such as India, are characterized by a number of inefficiencies arising from a lack of visibility into various processes. The root of these lies at the top Fast Moving Consumer Goods (FMCG) enterprise level, which has a domino effect on the rest of the supply chain.

A lack of visibility at the merchant level means that they find it hard to predict sales, leading to a mismatch in supply and demand, and eventually, a loss of revenue. Since they have a limited understanding of cash flows at a local level, FMCGs are also unaware of the specific credit needs of their merchants. And this has an impact both on the merchant and the FMCG itself - the latter is limited in terms of how many products it can push down the supply chain.

In addition, unrecorded cash transactions towards the end of the chain - between local distributors and MSME retailers - means there is a lack of formal data on cash flows at this level. Lenders are unwilling to give credit to smaller players in the ecosystem as they are considered risky, and due to this lack of credit, retailers settle for smaller stock quantities or lower quality products.

The impact of these inefficiencies in supply chain finance is thus inordinately felt by the retailers at the end of the supply chain. They are unable to seek formal credit (the current MSME credit gap in India stands at INR 25 Tn), and they end up seeking credit at exorbitant interest rates from informal lenders. Inadequate inventories results in frequent, opportunistic restocking which prevents them from establishing long-standing relationships with suppliers. 

Mitigating supply chain mismanagement with tech

Digitization holds the key: Today, each aspect of the supply chain works in silos. Digitizing every workflow brings down walls to create an integrated ecosystem in which every player has visibility into each piece of the supply chain puzzle. This is especially relevant to players towards the end of the chain, many of whom still rely on physical bookkeeping to track their finances.

The digital integration of smaller distributors and local stores through payment solutions, accounting apps, and banking solutions will generate standardized data on transactions within the chain, leading to increased transparency at every stage - tracking goods, inventory management, and sales.

Supply chain finance (SCF): Supply chain finance  is the use of financing and risk mitigation practices to optimize cash flows across the chain. Digitization of processes including invoice acceptance, e-singing etc has greatly brought down the cost of supply chain finance, which is built on sales agreements and data sharing between buyers and sellers. These agreements are used by Financial Service Providers (FSPs) to evaluate risk and generate a credit score to provide capital to expedite the flow of goods. 

Large FMCG corporations that are seeking to expand sales, especially in developing markets like India, are becoming increasingly aware of the need to ease cash-flow issues towards the lower end of the supply chain through supply chain finance . Those with internal Enterprise Resource Planning (ERP) systems that connect to vendors and suppliers are in a favorable position to embed lending into their existing infrastructure through partnerships with FSPs.

How does embedding credit impact FMCGs?

Supply Chain Finance allows Fast Moving Consumer Goods (FMCG) companies to partner with Financial Service Providers (FSP) to embed credit products and allow delayed payment from distributors. This enables better credit terms to flow downstream from the bigger distributors to even the smallest retailers.

For the FMCG brand in particular, partnering with a tech-enabled FSP comes with myriad benefits. 

For starters, the FMCG skips the trouble of setting up a credit program in-house and skips unnecessary risk.

The FSP, on the other hand, gains access to historical data on distributors and retailers, which is then analyzed via AI and ML to determine which retailer in a particular geographical area is, say, seeing increased demand but is unable to purchase inventory to meet it. 

With the help of this data analysis, the corporate can extend favorable payment terms to their biggest and most trustworthy distributors, and offer dynamic credit products based on retailers’ weekly or monthly performance.

Benefits for the rest of the supply chain ecosystem 

Digitization of process creates transparency across the ecosystem, which, for suppliers, improves the predictability of inventory requirements and sales patterns

For MSMEs, supply chain finance powered by Embedded Finance allows them easier access to credit, which is based on their actual sales. New-age FinTechs in the space are leveraging alternative data to assess MSME borrowers which is working to bridge the trust gap between lenders and small businesses. 

FinTech-led model of Supply Chain Finance


By embedding itself into the distribution system, supply chain financing could help fill the credit gap for India’s MSME sector, while also benefiting the FMCG corporation itself. The latter can increase its sales through increased visibility into retail sales cycles, optimize the supply chain through digitization, and finance stock onto the shelves of retailers on their own balance sheet

Embedded credit at the supply level thus acts as a one stop solution to improve credit access across the entire FMCG supply chain.