A report released in March this year by BCR publishing suggests that the supply chain finance (SCF) market could be worth as much as “EUR 43 billion in terms of funds in use, and growing at around 30% per year.” With these sorts of figures flying around, it should come as no surprise that adding SCF to their list of services and capabilities is becoming an increasingly important selling point for many B2B commerce networks and payments providers.
The managing director of BCR, Michael Bickers, noted the growth when commenting on the report:
“While supply chain finance is still in its relative infancy, we are now seeing rapid acceleration in terms of volume growth and market awareness. The report clearly suggests there is a long way to go in terms of potential volume growth and market development. Receivables are still very much under-utilized as an asset class for raising finance – but this is changing in the post-crisis environment where there is a much stronger focus on working capital.”
Global supply chains are complex constructions. Such is the diversity of multinational buyers and suppliers that are spread all over the globe – SMEs and large corporations alike are finding themselves increasingly under pressure to find means to unlock the working capital that becomes frustratingly trapped within their supply chains. As a result of globalization and offshore production, supply chains have lengthened considerably, and many companies have experienced significant reductions in capital availability. What is more, the increasing demands to improve cash flow have resulted in increased pressure on overseas suppliers. This has resulted in buyers being keen to prolong payment to their suppliers – something that suppliers simply cannot afford. And that’s where SCF becomes a valuable tool.
What is SCF?
SCF describes a set of solutions that optimizes cash flow throughout the supply chain. In the foremost, SCF is designed to allow businesses to lengthen payment terms while at the same time providing the option for suppliers, at a small cost, to get paid early. The result is a win-win situation for both buyer and supplier, as the buyer manages to optimize his working capital and better take advantage of supplier discounts, while the supplier gains access to much needed cash flow. As such, SCF reduces risk across the supply chain and unlocks liquidity.
How SCF Works
The process of SCF can begin as soon as the supplier sends an invoice to the buyer. Once the buyer has approved the invoice, he forwards it to the SCF provider. From here, the supplier is able to effectively sell the invoice to a financer (usually a bank) at an attractive rate. The risk, therefore, is transferred from the supplier to the financer. For example, in a supply chain with 60-day terms, with SCF it is possible for the supplier to receive payment on day 5 (albeit incurring a reduced amount), while the buyer is able to hold off payment to the financer until day 60.
Things To Know About SCF
- SCF Is A “True Sale”, Not A Loan – Supply chain finance is an extension of the buyer’s accounts payable (AP) and is therefore not considered to be a financial debt. For suppliers, it represents a true sale of receivables.
- Not Just For Large Corporations – SCF can be utilized by firms of all sizes and credit ratings, including SME suppliers.
- Multi-bank Capability – SCF does not need to be tied to a single bank or other financer.
- SCF Is Not Factoring – Once the invoice is paid, there is no recourse burden on the supplier. Factoring works by a business selling its accounts receivable (AR) (i.e. invoices) to a third party (i.e. the factor) at a discount. SCF, on the other hand, works by financers advancing funds using accounts payable (AP) as a liability. Put simply, the difference is contractual – factors contract with suppliers (i.e. the issuers of the invoice), whereas supply chain financers contract with buyers (i.e. the payers of the invoice).
The Success Of SCF
John Bruggeman, CEO of Traxpay writes that the “success of a SCF solution hinges on the real-time visibility and integrity of transaction data, banking beyond borders, and enabling all participants to connect, interact, and transact at the speed of global business.”
The concept of SCF is certainly not a new invention. However, it has only been over the last few years that it has shown substantial growth globally. Business continues to accelerate in global terms, the number of trading partners that a business has to manage is on the increase, and, as a result, the need for safer, faster, and smarter transactions is in high demand for both suppliers and buyers. With SCF, this can be achieved, as Bruggeman goes on to explain.
“For a modern enterprise, whether it is embracing or adapting to trends in globalization, digitization, or what some call the ‘extended enterprise’, conducting business today requires managing an increasingly complex set of relationships within an ecosystem that has become global. And, while these relationships continue to grow in complexity, corporates are demanding more efficient financial supply chains, with companies and their suppliers under conflicting pressures to improve payment terms, reduce prices, and improve cash flow efficiencies.” (The Paypers)
The key to unlocking the efficiency with SCF lies in a set of technology-based financial and business processes that seamlessly link together all parties – i.e. the buyer, the seller, and the financer – that are involved in a transaction.
One of the most important factors of successful SCF is in the software and technology that brings businesses together in partnership to speed up cash flow throughout the supply chain. A report produced for ACCA cites that SCF “can be defined (EBA 2013) as the use of financial instruments, practices, and technologies for optimizing the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners. The development of advanced technologies to track and control events in the physical supply chain creates opportunities to automate the initiation of SCF interventions.”
Innovative financial platforms like Traxpay enable such technology. Traxpay’s B2B Dynamic Payments provide total transparency in all transaction data, and combines and automates the necessary banking and business intelligence which is helping B2B trade relationships usher in a new era of global B2B commerce. With dynamic payments and dynamic discounting, as well as platforms that allow for reverse factoring (of which we will discuss more in one of our next blogs), Traxpay supercharges SCF possibilities for buyers and sellers who have the ever-pressing need to optimize cash flow, and in particular, at this critical time when banks are increasingly more selective in their policies for extending credit.