Supply Chain Finance – Who wins?
In this article Charles Findlay discusses who wins in supply chain finance.
Supply Chain Finance (SCF) changes or modifies the standard terms of a buyer-supplier relationship, whatever these happen to be for the industry, commodity and country or legal environment. This scope includes payment for goods or service, investment in assets or inventory and any other form where one party in the Supply Chain finances another party more cheaply than they can fund themselves. Starting from this position, we can take the prime motivation of a better net financial deal for one or another, or hopefully all, parties along the chain.
For the buyer or seller, a major investment is in Working Capital which includes supplier payments and customer financing. If SCF lowers the cost of this investment or increases the flexibility of providing it, buyers and sellers can win.
Operationally, companies can win with improved supply chain relationships. For suppliers to classify a buyer as a priority customer, and so deliver way beyond the contracted levels of service, their experience on how and when they are paid is an important consideration. At the other end of the scale, delay and uncertainty over when a supplier will receive its cash can lead to poor service, delayed deliveries and even to a supplier failure.
Logistics providers can win by increasing their scope of service by offering inventory finance, injecting liquidity into the Supply Chain.
Banks have become major providers of funds and platforms for SCF, some providing integrated finance and platform solutions, while others provide funds to the SCF platform providers, described in the next section.
There are an emerging group of new entrants with alternative financial backing, sometimes built on non-bank funding models, such as peer lending and crowd funding. These are also often linked to or are part of a platform or hub offering.
Governments and international institutions get involved to:
• shorten cash cycle times to encourage growth and investment
• improve the financing of SMEs
• encourage exports
• and support developing countries’ economies.
For example the Dutch Ministry for Economic Affairs supports and subsidizes ‘Betaal Me Nu’ (Pay Me Now) to provide Dutch SME suppliers access to additional liquidity with faster payment, or fast financing, of their invoices.
SCF can mitigate long export payment terms while the physical product is shipped abroad. E.g. ‘The Export-Import Bank of the United States (Ex-Im Bank) today approved the first transaction under its new Supply-Chain Finance Guarantee Program...’.
There is a particular focus on growth for less developed economies. International Finance Corporation (IFC) part of the World Bank ‘... established in 2010 the Global Trade Supplier Finance (GTSF) program ... short-term finance to emerging market suppliers and small- and medium-sized exporters, helping to address a huge shortfall in supply chain finance.’
So there may be many winners - to find out more, take a look at Financing the End-to-end Supply Chain, by Simon Templar, Charles Findlay, and Erik Hofmann. The book provides a detailed introduction to supply chain finance, demonstrating the importance of the strategic relationship between the physical supply of goods and services and the associated financial flows.