The Rise of Supply Chain Finance Across the Global Market. An Opportunity Not to be Missed

Cash may be king, but what if it gets stuck? What if it takes your business 30 days, 60 days, or even 90 days before getting paid? Those kinds of payment terms have become standard practices between most goods’ suppliers and buyers in various markets around the world, and it directly impacts their cash flows and ultimately their financial health. The rise of a receivable finance technique called Supply Chain Finance (SCF) could be the key to solving this issue. It not only benefits suppliers, but also brings great opportunities to their buyers as well as to the banks and financial institutions that facilitate this initiative.

What is Supply Chain Finance?

In essence, SCF allows the suppliers to receive early payments on their invoices through a financial institution, for a small commission. What differs SCF from other supplier finance techniques such as factoring, is that it’s initiated by the buyer. Suppliers can tap on the buyers’ credit ratings and access their funding costs of the buyer instead of their own, which are typically lower than what they could otherwise access.

An SCF process is a simple scheme:

• The buyer purchases goods and services from the supplier,
• The supplier issues their invoice with the payment due date within an agreed number of days (e.g. 30 days) and the buyer validates it,
• The supplier requests for early payment on the invoice,
• The financial institution sends payment to the supplier, minus a small fee previously agreed upon,
• The buyer pays the financial institution on the invoice due date.

Why bother with SCF?

The advantages of SCF outgrow its drawbacks, easily. Thanks to taking financial weight off suppliers’ shoulders upon financial institutions that can handle it, suppliers are able to have better liquidity and can optimize their working capital and better forecast their cash flows. Buyers are also able to optimize their working capital by streamlining their payment terms across all their suppliers. It improves the supplier–buyer relationship, and in turn, gives buyers stronger negotiating powers.

There may be a few drawbacks to SCF, but they all depend on a few critical elements. Of course, the fee that the supplier is required to pay to a financial institution is a reduction in their profit margin for each invoice and for some suppliers, receivables financing can even have a higher finance charge than contracting a standard line of credit from a bank. It is for the supplier to decide between receiving the money on the spot, reduced by the fee, or receiving it in full amount on the invoice due date. Another thing is that for both buyers and suppliers the process of SCF might be labor-intensive if done manually. Digitalizing and automating the process is crucial, and so is choosing the right software.

The better alternative

SCF is gaining popularity thanks to its convenience and protection it adds to business transactions. Considering the advantages, it is a triple-win situation for all involved parties: the buyer, the supplier, and the financial institution. The buyer can negotiate longer payment terms, e.g. 120 days from receiving the goods to settling the invoice, while generating revenue in the meantime. The supplier can access immediate working capital and take advantage of this early influx in liquidity. For especially smaller suppliers, it’s an alternative to other receivable finance techniques that may just be suiting them better.

Author: 

Luigi Piccolo, Business Development Manager at Comarch, Thailand

Luigi.piccolo@comarch.com