In a recent article, I noted Supply Chain Finance (SCF) as being one of the top trends for 2014 (read more here). This article offers a more detailed discussion of SCF.
SCF has been around for a while in one form or another but it is only in the last few years that this market has shown sustainable growth with a significant (global) opportunity ahead. SCF has proven its potential and ability to add value to both buyers and suppliers and I believe that this market is finally ready for prime time. Banks are certainly investing in this area (not only the large global banks) and we also see more sophisticated offerings from technology providers, some that have partnered with financial institutions (not always banks) and others that that take more of a agnostic approach.
Most of you are aware that SCF allows a supplier to sell its invoices to a bank (or other financial institutions) at a discount as soon as they are approved by the buyer. This allows the buyer to pay later and the supplier to secure its money earlier. Instead of relying on the creditworthiness of the supplier, the financial institution deals with the buyer – usually a less risky prospect. SCF is an innovative way for large companies to help their supply chain access credit and improve cash-flow at a much lower cost. SCF becomes an increasingly important source of credit to suppliers when banks tighten lending standards (cutting out a number of creditworthy small to medium sized businesses) due to increased pressure from regulators
While there is still a long way to go, many buying organizations are driving initiatives to automate the AP process forward and this plays an important part in planning and executing successful SCF activities. Having visibility into the invoicing process and access to real-time and accurate information is key to SCF, after all, suppliers get paid upon approval of an invoice and the quicker that invoice gets processed and approved, the better.
Benefits to the Buyer
- Improved cash flow (DPO) due to extended payment terms
- Optimization of working capital and improved liquidity management
- Potential early payment discounts resulting in reduced COGS
- Reduced risk with more financially stable and reliable supply chain
- Streamlined and automated payment, reconciliation and forecasting
Benefits to the Suppliers
- Accelerated receipt of payments and improved forecasting ability
- Improved cash flow and reduced working capital requirement
- Better financing rates and terms
- Automated payment process
- Reduction of client credit risk
Challenges and Opportunities
- To date, most supply chain finance instruments begin upon approval of an invoice, however, the need for financing starts earlier (when a PO is approved). There is an opportunity for funding institutions to get involved earlier in the transaction.
- Poor and/or costly onboarding of suppliers, especially if being onboarded onto multiple platforms from their buyers’ banks. Most banks also require Opportunity for supplier/B2B networks to get more involved with their networks of already connected buyers and suppliers and their streamlined and efficient methods of enrolling suppliers.
- Most banks require “Know Your Customer” (KYC) checks to be performed on suppliers that are considered new customers. This increases the total processing cost especially if they are international.
- Suppliers may not want to be in a position where they are dependent on the buyers balance sheet
- Possibility that extended payment terms (within an SCF initiative) has an impact on suppliers that are not participating.
Note: In countries such as Brazil and Mexico where there are strict mandates and regulations around eInvoicing there is a significant opportunity for SCF. Suppliers are required to submit eInvoices to buying organizations (in an XML format that is standardized and defined by the government) and the buyer must validate the invoice with the government. This removes a lot of the inefficiencies that often limit the ability to carry out SCF activities.
Overall, the future is bright for supply chain finance and the kinks are actively being worked on. Stay tuned for more on the SCF market in the coming months.
