Q&A

Therefore, the Supply Chain can be divided into:

► The Physical Supply Chain (PSC) can be defined as the activities involved in planning and executing the movement of goods and their documentation i.e., the processes involved in taking goods from the raw materials stage, through production to the ultimate delivery to the end customer. It is the underlying basis of economic functions which give rise to financial requirements and must be supported by financial supply chain activities.

► The Financial Supply Chain (FSC) describes the activities involved in planning and executing payments between trading partners i.e., the end-to-end trade processes and information that drive a company’s cash, accounts, and working capital. From a buyer’s perspective, this involves the purchase-to-pay cycle (the full procurement-to-payment process). For the seller, it is the order-to-cash cycle.

It is therefore the chain of financial processes, events and activities that provide financial support to PSC participants.

Financial supply chain management goal is to address these processes in order to achieve a range of benefits that include improved efficiency and visibility across the supply chain and a more favorable working capital position by optimizing accounts payable & receivable, cash management, risks and transaction costs.

The Financial Supply Chain is increasingly recognised as an area offering significant potential for generating bottom-line improvements and creating competitive advantage. According to many studies, “a typical billion-dollar company spends approximately $27 million annually for unnecessary working capital and inefficient processing functions because they lack visibility and performance into the Financial Supply Chain and receivables.

According to The Global Supply Chain Finance Forum, Financial Supply Chain Management “refers to the range of corporate management practices and transactions that facilitate the purchase of, sale and payment for goods and services, such as the conclusion of contractual frameworks, the sending of purchase orders and invoices, the matching of goods sent and received to these, the control and monitoring of activities including cash collections, the deployment of supporting technology, the management of liquidity and working capital, the use of risk mitigation such as insurance and guarantees, and the management of payments and cash-flow.

FSC management involves the orchestration of a range of contributors to meeting FSC needs such as internal corporate functions, trading parties, and service providers in the area of supply chain automation and in the whole range of financial services.”

Supply Chain Finance offers businesses an efficient and innovative way to optimize their cash flows

WHAT IS SCF – SUPPLY CHAIN FINANCE?

The Global Supply Chain Finance Forum defines Supply Chain Finance “as the use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions. SCF is typically applied to open account trade and is triggered by supply chain events.

Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.”

HOW?

“SCF consists of financing solutions designed to increase efficiency, improve working capital and reduce costs related to transactions between suppliers and buyers, creating a win-win situation for all the parties involved: suppliers, buyers and financiers.

SCF consists of two major categories:

► Receivable purchase products: Banks finance Suppliers through purchasing a part or the entire receivables from them and take these receivables off the balance sheet of the seller. The bank gains ownership over the receivable and holds the title rights.

► Loan-based products: Banks finance sellers/buyers through providing loans against receivables, PO, inventory etc. In this category, the receivable stays on the balance sheet of the seller, with the underlying asset being used as a collateral.”

IFC – International Finance Corporation

A collaborative Supply Chain Finance (SCF) program is a way that large companies can use the strength of their balance sheet to support their suppliers, who are generally smaller and often SMEs.

A collaborative Supply Chain Finance (SCF) program works by allowing a supplier to sell its invoices to a finance provider at a discount once they have been approved by the buyer.

Instead of relying on the creditworthiness of the supplier, the funder deals with the buyer, who is usually a less risky prospect. This means the supplier gets access to finance at a lower rate than they may have done.

That allows the buyer to pay later and the supplier to secure its money earlier and hence improve all parties’ working capital position.

How a collaborative SCF program operates – Standard process

Improves working capital – basically to release capital for the business

► Longer DPO (Days Purchase Outstanding): A collaborative SCF program creates the potential for extended payment terms without burdening suppliers.

► A collaborative SCF program creates a reduced working capital requirement resulting from extended payment terms.

An off balance sheet transaction

► Importantly, where properly structured and documented, arms-length finance for suppliers can be delivered in such a way that trade payables on the buyer’s balance sheet continue to be classified as commercial outstanding due to trade creditors, instead of being converted into bank debt which would otherwise impact negatively on the buyer’s debt gearing ratios.

Builds competitive advantage & strengthens relationship with trading partners

► A collaborative SCF program enables buyer to leverage his financial strength and use it as competitive advantage. It offers buyer an additional key argument when negotiating with suppliers.

► By providing his suppliers with working capital financing, buyer improves his image, reputation and relationship with Suppliers.

► The program helps develop more loyal and reliable suppliers.

► Enables suppliers to keep pace with buyer growth.

Lower Supply Chain risks. Creates a more collaborative, stable and financially robust supply chain which functions more efficiently for the benefit of the buyer and his suppliers

► Buyers’ financial processes are putting their supply chains at risk. Strapped for cash and lacking adequate access to affordable capital, suppliers may be forced to delay raw material ordering, squeeze work-in-process inventories, or skimp on plant maintenance or quality processes. This can trigger downstream delays and quality issues for the buyer, including expensive manufacturing line shutdowns, derailed store promotions, or late orders for critical customers.

Generates extra income &/or lower cost of goods sold

► A collaborative SCF program generates additional revenue and improves operating margin without deteriorating working capital.

Reduces ‘chaser’ queries from suppliers

► A collaborative SCF program reduces ‘chaser’ queries from suppliers regarding the current status of invoices i.e. have invoices been received, processed and approved? Suppliers can obtain the status of invoices and discounted early settlement offers on the client’s portal.
Suppliers calls to the buyer’s accounts payable department can drop by up to 90% when a buyer implements an SCF program and automated trade platform.

Cuts the cost of processing supplier payments by outsourcing the supplier payments process

► Buyer cuts his administrative and processing costs by effectively outsourcing its own payables management and payment administration e.g. Buyer makes one transfer to the bank rather than to hundreds of suppliers.
Overall, A collaborative SCF program reduces Buyer’s cash management costs.

Limits the intervention of (undesirable) external third parties

► A collaborative SCF program allows buyer to control the use of factoring by his suppliers and prevents the intervention/interference of third-party banks, etc..

Suppliers’ motivations vary a lot between different types of suppliers.

Relatively small suppliers have found that financing is fairly expensive for them and often difficult to obtain. The advantage of a Supply Chain Finance (asset based lending) programme for these small suppliers is greater than for larger companies because it gives them access to less expensive supplier finance / vendor finance than they could get on their own.

For the larger suppliers, it isn’t a question of cheaper finance. Larger suppliers see Supply Chain Finance (and asset based lending) more as a means to improving their financial flexibility, improving their balance sheet, and improving financial ratios, where needed.

Instant liquidity / Immediate access to cash. Reduced DSO & working capital requirement

> Supply chain financing creates the opportunity to receive early payment of invoices > SCF / factoring provides instant liquidity, which allows businesses to grow with funds that were previously tied up in receivables.
> supply chain financing (improves DSO and) creates a reduced working capital requirement resulting from reduced payables (receivables???) outstanding

Instant liquidity at favorable / competitive rates

> SCF / factoring provides instant liquidity, which allows businesses to grow with funds that were previously tied up in receivables.
> Where the supplier is a small or medium enterprise (SME) and the buyer is a large credit-worthy corporate, the discount cost will often be lower than the SME might achieve through conventional borrowing.
> SCF offers SMEs working capital financing at “favorable / competitive rates”.

Non recourse financing – No debt on balance sheet (déconsolidant)

> The funds raised through supply chain finance will usually be non-recourse for the suppliers since the discounted payment is structured as a receivables assignment.
> Being non-recourse early settlement, this funding is off balance sheet for the suppliers and therefore does not eat into their existing credit limits. This structure may enable the suppliers to access more funding than would be possible on a standalone basis.

> Since reverse factoring transfers the credit risk of the loan to the Suppliers’ high-quality Buyers, Bank can offer factoring without recourse to SMEs, even those without credit histories or strong financials.
This allows SMEs to increase their cash stock – and improve their balance sheets – without taking on additional debt.

Up to 100% receivables face value upfront financing

> The value of funds obtained is (usually / can be up to) the full face value of the invoices settled minus a discount charge for the period until maturity.
> Thus supplier receives a higher percentage of invoice face value than under a factoring or invoice discounting / financing arrangement, where typically only a pre-agreed percentage (e.g. 60-80%) of the invoice face value will be advanced.

Early and easy financing

> Easy, simple and straightforward process / financing of receivables. (Les fournisseurs concernés bénéficient d’un accès simple et rapide au financement de leur poste Clients.)
> The simple documentation signed between the funder and the supplier is usually a short form contract by way of a sale/purchase of receivables, whereby funder becomes the holder of the trade debt.
> Early, quick and convenient (pratique) financing (permet un financement très en amont des factures du fournisseur).

Enhances and secures relationship and business with buyer

> SCF payables financing creates an enhanced buyer relationship
> Donne la possibilité aux fournisseurs de suivre le rythme de la croissance de l’acheteur / future growth with the buyer will require less capital

Reduces transaction costs & Improves cash flow visibility

> Reduces ‘chaser’ queries regarding the current status of invoices, i.e. have invoices been received, processed and approved?
> Previously SMEs needed to collect payments, follow up and dun payment, etc. By factoring its receivables, the Supplier eliminates its collection costs by effectively outsourcing its receivable management.
> supplier finance / vendor finance (payables financing) gives the ability to better (accurately) predict payment flows (cash flows)