Financial supply chain is the monetary transactions that occur between trading partners that facilitate the purchase, production and sale of goods and services. Is initiated by the ordering part (customer) in order to help it suppliers to finance its receivables more easily at a lower interest rate than what would normally be offered
Also finance supply chain describe a set of technology based solutions that aim to lower financing costs and improve business transactions. Under this paradigm buyers agree to approve their supplier’s invoice for financing by a bank or other outside financiers.
According toEuro Publication, financial supply chain is a set of cross-functional disciplines that managekey process around risk, working capital and information. The emphasis on end to end process flows.
While the supply chain finance programmes are different ,most will typically involve the following steps;
- Supplier uploads an invoice onto the supply chain finance platform.
- Buyer approves the invoice for payment.
- Supplier selects chosen invoice for early payment via supply chain finance.
- Supplier receives payment straight away, with a smallfee deducted.
- The buyer pays the funder in full on the invoice due date.
Consider the diagram below.
For example; A company A purchase goods from the seller, supplier X under traditional circumstances, supplier X ships goods, then submit an invoice to company A which approves the payment on standard credit terms of 30days. But if supplier X is in dire need of cash it may request immediately payment at a discoufrom company A’s affiliated financial institution. If this is granted, that financial institution issue payment to supplier X and in turn extends the payment period for company A for an additional further 30days for a total of 60days rather than 30 days mandated by supplier X.
Benefits of finance supply chain
As the heart of any good supply chain finance program is theability to balance your working capital needs with those of your suppliers.Itoffers benefits to both buyers and suppliers.
Benefits for buyer
As a buyer, you may be focused on extending your days payables outstanding but conversely, your suppliers will want to get paid as early as possible, thereby reducing their days sales outstanding. Supply chain finance resolves this conflict by allowing your suppliers to receive payment early,while you pay later on the invoice due date.
As a result, buyers can benefit from supply chain finance in a number of ways, including:
- Improving working capital position. With supply chain finance, you can benefit from longer payment terms and an improved cash conversion cycle.
- Reducing supply chain risk. By supporting your suppliers with affordable financing, you can reduce the risk of disruption to your supply chain.
- Strengthening supplier relationship. Helping your suppliers improve their working capital can be a powerfull tool in building stronger relationship.
Benefits for supplier
Your supplies can also enjoy many benefits as a result of supply chain finance, from DSO, improvements to access to low cost funding all without affecting their existing credit lines.
- Lower cost of funding.Unlike other forms of receivables financing, supply chain finance is based on the buyer’s credit rating so the supplier’s cost of financing is lower than for solutions such as factoring.
- Working capital benefits. By taking advantage of early payment,supplier’s can reduce their DSO there by improving their working capital position.
- Improved cash flow. Cash flow improvement mean that suppliers will be in a better position to expand their business and invest in innovation.
- Remove financial constraints to growth.
- Eliminate the risk of buyer default.
- Get real time, online access to your client’s funding lines and interest rate.
Disadvantages of finance supply chain.
- Cost and Complexity of the solution. It can be difficult to understand the details of the approvement as well as how discount and the corresponding rate might be applied by the buyer. Where dynamic discounting tends to be fairly straightforward for the supplier. Supply Chain Finance solutions may require significant more steps inorder to receive early payment.
- Restrictions related to the number of early payment received. If funding is handled by a financial institution, that institution works on behalf of buyer and their own finance interest, they cna set a limit of how many invoices will be accepted in a month.
- Furthermore a customer may set aside a specific amount to use toward early payment. Once that amount is realized, customer funded early financing maybe curtailed until the next financial cycle.
- Interest rate are very low. As a result of Supply Chain Finance as a way of funding invoices has become very expensive for a supplier.
- There is an awful lot of money around and bnks are currently very keen to lend to businesses. A business that has a reasonable track record can usually borrow the money it needs quickly so supply Chain Finance is tending to be used more by business that have serious financial issues. Where lenders have increased their interest rate even further creating a vicious circle where higher levels of risk are driving up interest rate on an already expensive service.
- Is a relatively low margin business model. The pressure caused by low interest rate,plus the fact that the sort of suppliers ,means you need an awful lot of people opting or supply Chain Finance to make a supply Chain Finance business viable. And each of these suppliers needs a complex service contact increasing lost of service adoption.
As a result we end up with the worst of all world’s where supply Chain Finance providers must charge interest rate that are too high, meaning providers only attract high risk usres ND the cost of bringing them on to their service is too high. Users also tend to be quite small so the supply Chain Finance business needs a very large number of them to be viable.