• “Unchaining” Supply Chain Finance for SMEs  

“Unchaining” Supply Chain Finance for SMEs

Operating cash flow is the lifeblood of any business, but at times the stream can begin to stagnate. Since the recent credit crisis, liquidity has often dried up leaving firms and governments worldwide to become ever more concerned with their working capital and cash flow management. For SMEs (small and medium enterprises) in particular, the very growth engine of the economy, it has become increasingly difficult to gain access to financing from banks or liquidity providers at attractive rates. Without a credible working capital, SMEs are finding it harder to increase the volume of their transactions, and thus increase the size of their businesses.

Incorporating Supply Chain Finance (SCF) into the business model offers a simple solution to the problem. By implementing a set of technology-based finance and business processes (e-invoicing, purchase-to-pay, or ePayables for instance), the various parties in a transaction – i.e. the buyer, the seller, and the financing institution – can all be electronically linked with full transparency, resulting in lower finance costs and increased business efficiency. Through the use of a technology platform, on which all parties stand linked, all transactions are automated, invoice approvals are tracked, and the settlement processes are monitored by all parties from initiation to completion.

To use an example: the supplier will sell its buyer-approved invoices to a bank at a discount, which allows the buyer to pay later, and the supplier to secure its money earlier. The creditworthiness of the supplier is no longer an issue, as the bank now deals with the buyer, which is usually a less risky prospect.

The correct timing of invoice payments and collections by companies improves the working capital of all links in the electronic chain. When a functioning SCF model is in place, suppliers collect payments earlier and earlier, reducing Days Sales Outstanding (DSO) numbers, while buying organizations increase the payment terms to their suppliers. If there is one thing to be learned from the credit crisis it’s that buyers cannot extend payments over too long a period of time, as this may put financial pressure on a strategic supplier in the value chain. If the supplier goes bankrupt, then much more critical problems may result.

SCF encourages collaboration (rather than competition) between buyer and seller, and indeed the two parties can collaborate to get the best value for capital possible. For example, the buyer attempts to delay payment as long as possible, while the seller seeks to be paid as soon as possible. If, for instance, the buying organization has a better credit rating than the supplier, and can therefore access capital at a lower cost, the buyer can then use this as leverage to negotiate an extension of payment terms from the seller. The buyer is then able to conserve cash, and the seller also benefits from gaining access to cheaper capital.

Currently, it is mostly corporates that have a Supply Chain Finance model in place, and they are working towards onboarding their largest suppliers, as it is with these that the largest transactions will naturally take place, and therefore where the most savings in time and resources can be accrued. What corporates are currently failing to do, however, is offer support to the SME suppliers that they deal with to help them participate in SCF as well. Indeed, SME suppliers are the ones who probably need SCF most.

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