By Andrew Bartolini on January 24th, 2014, Cporising.com
In a recent article, I noted Supply Chain Finance (SCF) as being one of the top trends for 2014 (read more here). This article offers a more detailed discussion of SCF.
SCF has been around in one form or another for quite some time, but it is only been in the last few years that the market has shown sustainable growth and a significant (global) opportunity ahead. SCF has proven an ability to add value to both buyers and suppliers and I believe that this market is finally ready for prime time. Banks are certainly investing in this area (not only the large global banks) and we also see more sophisticated offerings from technology providers, some that have partnered with financial institutions (not always banks) and others that that take a more agnostic approach.
As you know, SCF allows a supplier to sell its invoices to a bank (or other financial institutions) at a discount as soon as they are approved by the buyer while the bank receives payment from the buyer. This allows the buyer to pay later and the supplier to secure its money earlier. Instead of relying on the creditworthiness of the supplier, the financial institution works with the buyer which is usually a less risky prospect. SCF is an innovative way for large companies to help their suppliers access credit and improve cash-flow at a much lower cost than they could find in the debt market. SCF becomes an increasingly important source of credit to suppliers when banks tighten lending standards (cutting out a number of creditworthy small to medium sized businesses) due to increased pressure from regulators
While the market has not fully arrived, many buying organizations are driving initiatives to automate the AP process which can play an important part enabling an SCF program. On the buyer’s side, having visibility into invoice processing and access to real-time and accurate information is critical to SCF success since the sooner an invoice is approved, the sooner the supplier can be paid and the larger a potential discount may be.
Here’s a quick sketch on why Chief Procurement Officers and other readers of CPO Rising may find SCF valuable:
Benefits to the Buyer
- Improved cash flow (DPO) due to extended payment terms
- Optimization of working capital and improved liquidity management
- Potential early payment discounts resulting in reduced COGS
- Reduced risk with more financially stable and reliable supply chain
- Streamlined and automated payment, reconciliation and forecasting
Benefits to the Suppliers
- Accelerated receipt of payments and improved forecasting ability
- Improved cash flow and reduced working capital requirement
- Better financing rates and terms
- Automated payment process
- Reduction of client credit risk
Challenges and Opportunities
- To date, most supply chain finance instruments begin upon approval of an invoice, however, the need for financing starts earlier (when a PO is approved). There is an opportunity for funding institutions to get involved earlier in the transaction.
- Poor and/or costly onboarding of suppliers, especially if they are being onboarded onto multiple bank platforms for their different customers.
- Opportunity for supplier/B2B networks to get more involved with their networks of already connected buyers and suppliers and their streamlined and efficient methods of enrolling suppliers.
- Most banks require “Know Your Customer” (KYC) checks to be performed on suppliers that are considered new customers. This increases the total processing cost particularly the case if they are international.
- Suppliers may not want to be in a position where they are dependent on their customers’ balance sheets for funding
- Possibility that extended payment terms (within an SCF initiative) has an impact on suppliers that are not participating.
Note: In countries such as Brazil and Mexico where there are strict mandates and regulations aroundeInvoicing there is a very significant opportunity for SCF. Suppliers are required to submit eInvoices to buying organizations (in an XML format that is standardized and defined by the government) and the buyer must validate the invoice with the government. This removes a lot of the inefficiencies that often limit the ability to carry out SCF activities.
Overall, the future is bright for supply chain finance and while kinks remain, they are being worked on actively. Stay tuned for more on the SCF market in the coming months.