Supply Chain Finance (SCF) is something that we are being asked about much more today than we have in the past. Many of the practitioners we speak with have heard the term Supply Chain Finance, but are not exactly sure how, and if, it pertains to them, and if it is something they need to investigate and pursue. Let’s begin with an overview.
Supply Chain Finance Overview
Supply Chain Finance is an advanced financial solution that accomplishes two primary goals: 1) suppliers are paid more quickly, but at a slight discount, and 2) buyers preserve their Days Payable Outstanding (DPO) and cash on hand. In simple terms, SCF is an early payment discount technique that uses third-party capital, typically from a financial institution or third-party lender, to pay an invoice early (instead of internal buyer funds). The early payment is sometimes scheduled and processed the instant an invoice is approved. This allows a supplier to receive its money on a pre-selected schedule at an agreed-upon discount, while the buyer pays the third-party the full cost of the invoice at the original maturity date. SCF also increases the buyer’s free cash flow by extending payment terms, which can generate higher, mostly risk-free returns as well as enhance corporate liquidity. Improved liquidity can make the enterprise more equipped to deal with financial risks in the short term, and also bolster the organization’s long-term financial health. Depending on the SCF provider, the buying organization could also receive rebates as an incentive to increase volume.
New Technology Leads to Higher Adoption Rates
Historically, SCF programs have had low penetration rates with programs being reserved, or considered, only for an organizations’ top 5 or 10 suppliers. In an Ardent Partners research study from 2016, only 18% of respondents indicated they were currently using SCF programs. But this has begun to rapidly change more recently though, with a newer breed of financial technology solution providers (such as C2FO and Prime Revenue) developing SCF tools with a broad-based market applicability. These new solution providers not only appeal to large organizations, but also to small and mid-sized enterprises that large financial institutions typically did not serve with SCF. This has the potential to significantly increase the solution’s adoption in the near future.
The true value of supply chain finance lies – in creating a “win-win” situation for both buyers and suppliers. Buyers win by being able to improve their financial results, while also strengthening relationships with suppliers. Suppliers win by having outstanding invoices paid sooner and being able to reinvest that capital back into their organizations. It is worth noting that SCF is not a panacea, and is most often used in conjunction within an organizations overall working capital management strategy. This does not negate its value, however, which can be – and frequently is – significant.
Final Thoughts
The rise of cloud solutions has made SCF accessible for more and more businesses. SCF can be a powerful cash management tool and it is imperative that today’s AP and finance teams understand the current solutions available and how SCF can be integrated into current cash management activities. Proper understanding of SCF and the options available on the market is crucial to ensure successful implementation and realization of the benefits it can bring. ‘Cash is King’ and always will be. Supply chain finance has become a viable option for organizations seeking new cash management strategies that can boost liquidity, optimize cash management, and improve supplier relationships and satisfaction.
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