Supply Chain Finance (SCF) is conceptually a simple trade financing product where suppliers get banks and/or other providers of trade financing to discount their receivables from their buyers (usually better rated). While the buyer continues to show the invoice as an account payable (for example, 90 days from shipment date), the supplier gets access to funds upfront.
In the context of international supply chains, a number of suppliers are smaller companies with limited credit liquidity and a higher cost of funding than their buyers. As the credit risk of financing the receivables is predicated on the better-rated buyer, SCF helps to reduce financing costs for these suppliers. Depending on the payment terms, it can also be beneficial for the buyer, resulting in a win-win situation.
While this works well from the supplier’s perspective, however, buyers are usually larger investment-grade corporates with business operations across multiple countries. These corporates want to ensure smooth production, have the ability to deliver finished goods to customers as per their requirements and access lower financing costs or better working capital terms. To be sustainable, they also need certainty that the overall trade volumes for a SCF programme are maintained at a certain level.
It is important, therefore, for any SCF provider, whether a bank, fintech or a combination, to ensure that a large quantum of funding is made available to suppliers on an ongoing basis and at competitive pricing levels in order not to jeopardise the production of finished goods.
As SCF has become more established, the technology platforms that support it have become more sophisticated – capable of providing end-to-end integrated processing and financing for the entire manufacturers’ supply chain, including the vendors of those suppliers. Banks and fintechs are vying with each other to upgrade technology platforms and management information systems, so as to gain an edge over their competitors.
For treasurers looking into SCF, it will be important to focus on the value-add and potential contribution to the bottom line. In order to maximise supply chain benefits across the organisation, it is important to focus both on the quality and quantum of finance and the technology platforms designed to deliver it.
Senior management team buy-in is essential for any SCF implementation. A senior management team that delivers a consistent message on SCF across the organisation is an important prerequisite for implementation, if cooperation from other departments is to be secured.
Treasurers considering SCF implementations should also consider:
What is required here is a team of experts who will pitch the SCF programme to suppliers and manage their customer queries. This is one of the most precarious areas of the process and one that has been insufficiently staffed in the past, especially by banks, due to the high headcount requirement. Corporate treasurers implementing a SCF programme need a strong grasp of the vendor on-boarding process of the SCF technology platform provider, to help maximise the number of suppliers joining their SCF programme.
While the monetary benefits and interest cost reduction for SCF are likely to be most attractive to smaller suppliers, ie those with limited credit and liquidity, and usually at high interest margins, buyers also need to include larger suppliers. In any supply chain the 80:20 rule is usually evident, with 80% of procurement coming from 20% of the vendors. If the buyer is to ramp-up its SCF programme quickly and start seeing benefits to its profit and loss, it will be important to include larger suppliers – albeit at finer pricing levels.
Most global corporates want to access the benefits of globalisation by sourcing their goods from the lowest possible cost base and selling at high margins. A number of global corporates have set up their manufacturing capabilities in emerging markets and require a SCF technology platform that will support their local buying entities and suppliers based in these countries. However, some emerging-market locations where manufacturing plants are located have stringent regulatory and compliance requirements that might exclude offshore financing solutions, so corporates must look closely at the capabilities of SCF technology platform providers within these emerging-market countries.
Corporates should look beyond the usual ecosystem of SCF technology solution providers. There may be potential to leverage partnerships with banks to help maximise both quantum and costs for a SCF programme. For example, some relationship banks that don’t have their own SCF technology platform may be willing to support their clients for short-term funding structures. Corporates may be able to work with regional or smaller banks – especially in-country for emerging-market SCF solutions. Non-core ‘relationship’ banks active in SCF may be interested in exploring opportunities to expand their relationship with corporates.
Corporate treasurers may want to explore working with trade finance experts and advisers as they navigate SCF. Outside expertise can bring a wider perspective and offer examples of how other corporates have implemented and scaled up their SCF programmes across different industries and geographies. In addition, they can be of help when it comes to breaking up silos between different departments within corporates.
Working with outside advisers could potentially be cost-neutral, as they may help structure and optimise the overall supply chain solution to achieve the goals and objectives, but also help bring in new sources of liquidity from other supply chain investors (usually at a lower cost).
SCF is a great business tool to increase liquidity and reduce costs within the manufacturing cycle using a trade finance solution/product offering. SCF programmes help to integrate the manufacturing process and ensure credit and liquidity at competitive price levels. However, implementation requires a significant amount of commitment within corporates from IT, treasury, procurement and finance departments.
Treasurers considering this route would need to build and communicate a strong case on how a SCF programme could bring efficiencies across departments and geographies, add to the bottom line and improve shareholder returns.
Anurag Chaudhary is CEO of Pinnacle Trade Finance Limited, United Kingdom. Prior to that, he was a managing director in Citibank London and part of Citibank’s global trade management team