Supply Chain Finance for SME’s

Supply chain finance (SCF) is a valuable tool for small and medium-sized businesses that are growing or struggling to grow because of unstable cash flow.  

In this article, we’ll explore what supply chain finance is, how it works, and why it’s become increasingly popular among businesses of all sizes. First, a success story:

Sheltering from the storm – a case study

Robert was no stranger to success in the manufacturing world. His company had become a market leader through hard work, savvy business moves, and a dedicated team. However, Robert also had the foresight to realize that economic winds can shift rapidly.  

As predictions of an economic storm on the horizon increased, he knew being proactive was key to protecting his business.

That’s when Robert came to us, intrigued by this concept of supply chain finance. Despite his business’s strength, he understood the need to secure more flexible cash flow options to reinforce his company’s financial fortifications.

The Solution

We showed Robert how supply chain finance offered a solution that would benefit his company regardless of what the economy threw his way.  

We would pay Robert’s suppliers upfront on Robert’s behalf. But crucially, Robert wouldn’t need to repay us until after he had delivered products to his own customers and booked the profits.

Robert immediately saw the strategic value in this approach. It would decouple his payables from their receivables cycle, providing a cushion of flexibility. If an economic downturn did arrive, Robert would have a built-in solution for keeping his  supply chain humming along smoothly.

However, supply chain finance wasn’t just a defensive manoeuvre. Robert was equally excited about the opportunity to offer his own suppliers’ early payment in exchange for a discount. This would improve his margins while strengthening loyalty across his supply chain during both good times and bad.

Success

Implementing supply chain finance allowed a proactive business leader like Robert to control his own destiny.

Instead of being reactive to potential headwinds, he could batten down the financial hatches early and keep his firm’s sales engines running full steam ahead.

In the months and years that followed, supply chain finance proved to be a wise investment. Robert deftly leveraged it to support growth, nurture key supplier relationships, and safely navigate any temporary choppiness in the waters. His foresight and strategic use of this financial facility allowed his company’s success story to play out unencumbered.

Huge global market

The global supply chain finance market is significant and growing rapidly. According to a report by Allied Market Research in September 2023, it is projected to reach $13.4 billion by 2023, growing at a compound annual growth rate of 8.8% during 2022-2031.

Until recently, large SCF platforms catered primarily for blue chip companies.  Now, supply chain finance is available to businesses of all sizes.

What is the purpose of supply chain finance?

The primary purpose of supply chain finance is to improve cash flow and working capital for both buyers and suppliers.

It typically involves three parties: the buyer, the supplier, and a finance provider.

Why Do businesses Use supply chain finance?

A company (the buyer) that wants to preserve its working capital might take as long as possible to pay for goods. That’s generally an unpopular move, so, it arranges for a finance company to pay suppliers on its behalf.

The finance company gets its money back after the buyer has on-sold the goods or engineered them into a product that is later sold. It means that the company is able to generate a profit without using its own money.  Typically, it will repay the finance company within 60 days to 90 days although it can be even longer.

The supplier of the goods also wins because instead of waiting weeks or months for the buyer to pay, it gets paid on the due date. If the supplier offers a discount the bill can be paid even earlier ensuring it has working capital available to meet its daily needs.

How does supply chain finance work?

  • Company A (the buyer) purchases goods worth $100,000 from Company B (the supplier).
  • Company A and Company B agree to extend payment terms from 30 days to 90 days.
  • Company B delivers the goods and submits an invoice to Company A.
  • Company A approves the invoice using  the SCF platform.
  • The finance provider pays Company B $100,000 within a few days.
  • Company A pays the finance provider $100,000 plus a fee on the extended payment term (90 days).

In this example, Company B gets paid early, improving its cash flow. Company A can hold onto its cash for an additional 60 days, improving its working capital.

What is dynamic discounting?

Dynamic discounting (also known as early payment discounting) is a strategy that complements supply chain finance and can provide additional benefits to both buyers and suppliers. With dynamic discounting, suppliers offer a sliding scale of discounts based on the number of days the buyer pays early. The earlier buyers pay, the larger the discounts they receive.

Dynamic discounting can be integrated into SCF platforms, allowing buyers to take advantage of early payment discounts while still benefiting from extended payment terms. This approach can further optimize working capital and cash flow for both parties.

How much does supply chain finance cost?

The cost of supply chain finance varies depending on the finance provider, the creditworthiness of the buyer, and the specific terms of the arrangement. Typically, the finance provider charges a fee based on the invoice value and how long it takes for the funds to repaid. 

What are the benefits of supply chain finance?

Buyers

  • Improved Working Capital: By extending payment terms, buyers can hold onto their cash for longer, improving their working capital position.
  • Stronger Supplier Relationships: Buyers can strengthen their relationships with suppliers and improve supply chain stability by ensuring suppliers get paid on time.
  • Increased Negotiating Power: With access to early payment, suppliers may be more willing to offer discounts or better pricing to buyers.
  • Simplified Processes: SCF platforms often automate and streamline processes, reducing administrative burdens.

Sellers

  • Improved Cash Flow: Suppliers improve their cash flow to better manage their working capital by getting paid earlier than the extended payment terms.
  • Access to Affordable Financing: SCF provides suppliers with an alternative source of affordable financing without the need for traditional loans or credit lines.
  • Stronger Customer Relationships: By participating in SCF programs, suppliers can strengthen their relationships with larger, more creditworthy customers.
  • Increased Competitiveness: With improved cash flow, suppliers can better meet their financial obligations and stay competitive.

What are the downsides of Supply Chain Finance?

  • Multiple Stakeholders:  Co-ordinating and aligning the interests of all the parties to an agreement can be challenging if there are differing priorities or levels of commitment.
  • Fees and Costs: This is not set-and-forget financing like a traditional bank loan. It needs to be monitored and managed proactively.
  • Conflicts of Interest:  Buyers and Suppliers may have competing ambitions and,  if not managed transparently, this could result in tensions and disputes.
  • Implementation: Supply chain finance represents unfamiliar territory to many companies and will initially require coordination across various functions within an organisation
  • Credit and Financial Ratios:  As with all forms of finance, supply chain finance will impact on your credit rating and financial ratios.

What is the difference between supply chain and trade finance?

While supply chain finance and trade finance share some similarities, they are distinct financing solutions:

Trade Finance: This is a financing solution designed to facilitate specific purchases from domestic and international suppliers.

Supply Chain Finance: SCF is more holistic to the extent that it focuses on optimising working capital and cash flow within a buyer-supplier relationship mostly within a domestic or regional supply chain.

What is the difference between supply chain and invoice finance?

Supply chain finance and invoice finance are both working capital solutions, but they differ in their approach and target audience:

Invoice Finance: (also known as factoring or invoice discounting). It involves a finance provider purchasing a company’s outstanding sales invoices at a discount and advancing a percentage of the invoice value upfront.

Supply Chain Finance: This is a collaborative solution that involves a buyer, a supplier, and a finance provider, with the primary goal of optimizing working capital across the supply chain.

What does it mean for my balance sheet?

Supply chain finance can have an impact on a company’s balance sheet, particularly in the areas of accounts payable, accounts receivable, and working capital:

Accounts payable: When a buyer extends payment terms through SCF, their accounts payable balance may increase in the short term, reflecting the extended payment period.

Accounts receivable: For suppliers, their accounts receivable balance may decrease as they receive early payment through the SCF program.

Working capital: By extending payment terms, buyers can potentially improve their working capital position, as they can hold onto their cash for longer. Suppliers, on the other hand, can improve their working capital by receiving early payment on their invoices.

It’s important to note that this is not financial advice. Talk with a qualified professional because the impact on balance sheets may vary depending on the specific accounting treatment and the terms of the SCF arrangement.

Initiating supply chain finance

The buyer or the supplier can initiate a supply chain finance facility. It will depend on the circumstances and objectives of whoever wants to set it up:

Buyer-Initiated: In many cases, the buyer initiates the SCF facility as part of their working capital management strategy. By extending payment terms and leveraging their creditworthiness, buyers can improve their cash flow and strengthen relationships with suppliers.

Supplier-Initiated: In some cases, suppliers may initiate the SCF facility to improve their cash flow and access affordable financing. They may approach their larger customers and propose an SCF program to address their working capital needs.

However, at the end of the day, both parties must agree to the terms and conditions, and a finance provider must be involved to facilitate the arrangement.

Why has supply chain finance become so popular?

Supply chain finance has gained popularity in recent years due to several factors:

  • Increased Focus on Working Capital: Companies are increasingly recognizing the importance of effectively managing their working capital and cash flow.
  • Supply Chain Disruptions: Global supply chain disruptions have highlighted the need for stronger and more resilient supply chain relationships.
  • Technological Advancements: The advent of cloud-based platforms and automation has made SCF solutions more accessible and easier to implement.
  • Bank Regulations: Tighter bank regulations have made it more challenging for SMEs to obtain traditional financing, driving the demand for alternative financing solutions like SCF.

Last word

In conclusion, supply chain finance has emerged as a powerful tool for businesses, particularly small and medium-sized enterprises, seeking to optimize their working capital and cash flow management.

By leveraging the creditworthiness of larger buyers and providing early payment options to suppliers, SCF programs create a win-win situation across the supply chain.

For buyers, SCF offers the ability to extend payment terms, preserve working capital, and strengthen supplier relationships.

Suppliers, on the other hand, benefit from improved cash flow, access to affordable financing, and the opportunity to build stronger ties with their customers.

As the global economy continues to evolve and supply chain disruptions become more prevalent, the need for agile and resilient financing solutions will only continue to grow. SCF addresses this need by fostering collaboration, transparency, and mutual benefit among all parties involved.

While implementation and coordination may present initial challenges, the long-term advantages of SCF, such as streamlined processes, enhanced competitiveness, and greater financial stability, make it an increasingly attractive option for businesses of all sizes.

The supply chain finance market continues to expand, with technological advancements and regulatory changes further driving adoption. SMEs would be well-advised to explore and leverage this innovative financing solution to fuel their growth, weather economic storms, and thrive in an ever-changing business landscape.



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