While supply chain finance (SCF) has been available for quite a number of years in various forms, it has only begun to show substantial growth globally over the last few years. The growing popularity of SCF has been largely driven by the increasing globalization and complexity of the supply chain, especially in industries such as automotive, manufacturing, and the retail sector. However, this landscape is changing to include almost every industry. As the pace of business continues to accelerate on a global basis—and there are many new trading partners to manage—it’s easy to see how SCF can make transacting faster, safer, and smarter for both buyers and suppliers.
Supply chain finance can mean many things to many people, but in general it refers to a set of technology-based business and financing processes that link the various parties in a transaction—the buyer, seller, and financing institution—to lower financing costs and improve business efficiency. Banks definitely see SCF as a viable investing option, and this includes smaller institutions and not just the large international ones. Technology providers are also joining the trend and partnering with various financial entities and other organizations that are looking to participate in this lucrative market.
SCF generally involves the use of a technology platform in order to automate transactions and track the invoice approval and settlement process from initiation to completion.
There are a number of SCF transactions, including the extension of buyer’s Accounts Payable terms, inventory finance, and payables discounting. SCF solutions differ from traditional supply chain programs to enhance working capital—such as factoring and payment discounts—in two ways:
- SCF connects financial transactions to value as it moves through the supply chain.
- SCF encourages collaboration between the buyer and seller, rather than the competition that often pits buyer against seller and vice versa.
For example, the buyer will attempt to delay payment as long as possible, while the seller seeks to be paid as soon as possible. SCF works especially well when the buyer has a better credit rating than the seller and can therefore access capital at a lower cost. The buyer can leverage this advantage to negotiate better terms from the seller such as an extension of payment terms, which enables the buyer to conserve cash or use it for other purposes. The seller benefits by accessing cheaper capital, while having the option to sell its receivables to receive immediate payment.
In addition to providing less risk for the supplier, it also improves the cash flow. SCF is a proven way for sellers to receive payment and increase cash flow when banks become more selective in their policies for extending credit.
Benefits to Buyer
- Improvements in cash flow
- Ability to optimize working capital
- Ability to take advantage of discounts for early payment
- Reduction of risk factors
- Fast and automated payment, forecasting, and reconciliation
Benefits to Suppliers
- Faster payment receipt
- Reduction in required working capital
- Better terms and financing rates
- Reduction in credit risk
Faced with increasing pressure to meet short-term liquidity needs, companies are looking inward for ways to release trapped cash from operations. Today’s CFOs and Treasurers are taking a fresh look at how their physical supply chain is impacting their companies’ cash flow and working capital management.
Concerned about the rising risks in their supply chains stemming from the economic stress on suppliers, volatile energy and commodity prices, and broad based financial turmoil, today’s executives are actively looking at SCF options in terms of lowering their overall financial supply chain costs.
Traxpay enables faster, safer, smarter SCF by working with B2B commerce network operators, financiers, and corporates to provide automated and transparent B2B payments, capture and maintain all data related to the transaction, and integrate seamlessly into existing corporate workflows— providing visibility into the status to all parties involved.