Trade finance global

James Sinclair

26 Sep 2016

What is Supply Chain Finance?

For suppliers, Supply Chain Finance is an incredibly useful form of financing which can help strengthen a balance sheet, improve cash flow, and lengthen payment terms advantageously. James Sinclair at Trade Finance Global tells us how the global supply chain finance outlook is changing and what this means for companies who process payments and charge clients.

What is Supply Chain Finance?

Simply put, global supply chain finance (or SCF) is an umbrella term used for bettering the financing facilities of a supplier. It uses a buyer’s good credit rating to advance payment to suppliers, meaning less time waiting to get paid, security over payment from a buyer, and establishing a strong relationship with a buyer.

As shown in the above diagram, SCF is a tool which benefits suppliers once they sell or discount invoices to a financial institution. It also allows the buyer to negotiate more competitive prices or favourable payment terms. Trade Finance Global have put together a more detailed Supply Chain Finance Guide here.

What’s the difference between SCF and invoice finance?

Invoice discounting is the advanced payment of one-off invoices to a supplier, provided by a financial institution. SCF encompasses invoice financing, but it’s often referred to as ‘reverse factoring’ because it provides finance based on purchase orders which then flows into your sales invoices.

What are your thoughts on the changing face of Supply Chain Financing?

We believe that as SMEs grow and buyers often demand extended payment terms, it’s difficult to have enough ‘cash in the bank’ to pay staff, buy stock, and do business as usual. Supply Chain Financing is innovative and now largely digitalised, and as companies are under pressure to have strong balance sheets and maintain liquidity, SCF is a solution to help companies manage multiple orders from many buyers and continue to grow.

Invoice financiers such as Satago can easily fit in to the SCF cycle by controlling and advancing payment of some invoices flowing into a sales ledger, but Purchase Order finance, or cash flow finance before the goods or services are made, is often needed prior to receiving an invoice.

Can you give us an example of supply chain finance?

One of our clients is a large manufacturer of household goods. Funded initially by equity investors, the company had undergone a capital intensive period of research and development, manufacturing the product, and taking it to market (both through TV advertising and then sending to buyers and resellers).

The company had a subsidiary in the UK and also in the US. Both knew that it was only a matter of months before they would face working capital issues, owing to the demands of the buyers and unreliable payment terms, currently funded by the companies’ equity cash. A supply chain finance solution was put in place to provide the company with purchase order finance. Once the company then invoiced the buyers after shipping the household goods, an invoice factoring facility was used to discount invoices. As a result, the company freed up £250k of working capital which could be used on growth in other parts of the business.

What’s the future of Supply Chain Finance?

Finextra once said that the adoption of SCF is slow, but we disagree.

Alternative financiers (like Satago) are utilising technology to allow for rapid credit checks and KYC, enabling ‘simple invoice finance’ to go automated. We’ve seen the birth, growth and plateau of online bank accounts being set up from one’s phone, the growth of the online (largely automated) car insurance industry, and the peer-to-peer invoice finance marketplace, SCF will follow suite.

The biggest challenges are integrating automation with complex finance, and there’s always a need for non-robot financiers to structure a complex trade, but it doesn’t stop parts of that trade (e.g. the invoice discounting line) to become integrated and digital.