How to tackle modern supply chain finance
By Louise Beaumont | Supply Chain Digital
Given the inter-dependency of business on its supply chain, the knock on effect of supplier and subcontractor pressure on corporate buyers is something not to be ignored.
Many larger companies have found themselves at the sharp end of supply chain disruption with research suggesting that £58m was lost dealing with the fall-out of disruptions in 2013 alone. According to a report by BACS Payment Schemes, one in four SMEs said that if the amount it was owed grew to £50,000, it would be enough to send it into bankruptcy; a sobering thought. In its broadest sense, supply chain finance offers a way for large companies to help their supply chains improve cash flow by giving them access to cash using their own cash reserves and/or credit rating.
Over the pond, President Obama has just launched SupplierPay, a new partnership with the private sector to strengthen small businesses by increasing their working capital, so they can grow their businesses and hire more workers. In reality, traditional supply chain finance remains the preserve of the largest companies due to cost and complexity of implementing the outdated systems and processes needed to make supply chain finance work.
Problems such as the banks restricting their services to investment grade companies, difficulty in getting suppliers and subcontractors on board, and a lack of alignment between purchasing and finance teams in large corporates are all factors in this issue. Thanks to innovations in the market and the use of technology to disintermediate the banks and bring all the parties together in online platforms, the situation is changing. Cloud-based systems has the benefit of no IT hardware implementation costs, no legal fees and no substantial finance costs for the corporate, making it accessible to a far wider range of businesses.
Systems such as Platform Black’s uses peer-to-peer principles to bring investors, suppliers and subcontractors together. Invoices that have been approved by the lead contractor can be traded to investors, allowing the suppliers to get early payment.
For suppliers and subcontractors, the prospect of being able to access early payment on an approved invoice (to 100% of value less finance and transaction costs) is an additional incentive to provide goods and services on budget, on time, and to the correct standard. Investors base their required return on the creditworthiness of the lead contractor alone.