What is Supply Chain Financing?

Supply chain finance can effectively solve the financing problems of small and medium-sized organizations. At present, supply chain finance is the fundamental way for small and medium-sized organisations to solve the financing difficulties and expensive financing, and it is also an important part of the national economic development. The scale of Supply Chain Financing (SCF) is also increasing year by year.

Supply chain financing is a financing model, which develops a holistic financial solution based on financial power and cash flow control and the transaction relationship and industry characteristics of organisations in the supply chain as a whole. It can reduce the financing cost of supply chain and improve the competitiveness of core organisations and supporting organisations.

SCF is an important part of supply chain management, linking buyers and sellers to financial institutions to help companies reduce financing costs and improve efficiency. Most importantly, supply chain financing frees up working capital in the supply chain.

It covers a range of services for large and medium-sized organisations. For example, loan, purchase order financing, processing, and invoice discounting are the most common services.

Supply chain financing refers to relying on a core organisation, around the upstream and downstream of this organisation to carry out financing activities, to provide a series of financial services to the entire industrial chain. is a financing concept.

Why Supply Chain Finance?

Supply chain financing makes sales easier and therefore popular. Commercial transactions can increase security through supply chain financing and facilitate global import and export activities. In other words, this is a win-win strategy for all parties involved.

We also say that Supply Chain Finance can be the use of risk mitigation practices and techniques to optimize both the management of working capital and the liquidity invested in processes and supply chain transactions. In practice, SCF seeks solutions to meet the needs of the supplier who wants to be paid as early as possible and the needs of the buyer who generally wants to delay payment to improve cash flow.

Let’s take a closer look.

Negotiating payment terms for the buyer (debtor) of goods is a standard practice, such as re-settlement of invoices 60 to 120 days after delivery, so that the buyer can earn revenue from the sale of the goods before paying the original invoice.

Similarly, the seller needs financing to obtain working capital as quickly as possible. For example, a business can increase inventory or pay a salary after it receives a cash injection. In addition, short-term credit is conducive to infrastructure investment. In general, managers can avoid missing opportunities due to a lack of liquidity through supply chain financing.

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Financial institutions are intermediaries in the financing process and are responsible for guiding clients and due diligence counterparties to assess the qualifications of sellers and their debtors in accordance with the Know Your Customer (KYC) principle. In addition, financial institutions analyze the duration and credibility of financing. The company will charge a commission based on the nominal amount and the number of financing days. In fact, the longer a buyer delays payment, the higher the cost.

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To look at the concept a little more, Supply Chain Finance focuses on managing financial flows in the supply chain to:

>>Obtaining resources;

>>Reduction of the Need for Working Capital;

>>Reduction of costs of access to credit.

Advantages of Supply Chain Finance

We can understand that SCF aims to please both sides of a supply chain, i.e. buyer and supplier. Therefore, the key concept behind Supply Chain Finance is precisely to provide suppliers with access to advantageous financing facilities, including the anticipation of deadlines, which will therefore strengthen working capital. As far as buyers are concerned, they can benefit from longer payment terms or discounts with their suppliers.

Thus, some of the benefits of Supply Chain Finance include:

Suppliers have the option of seeking advance payment as a means of increasing working capital;

Buyers can usually negotiate longer payment terms or discounts with suppliers;

Improvements in cash flow from both suppliers and buyers;

Better management of working capital, since it is possible to negotiate longer maturities for payment;

Business relationships with suppliers tend to be more reliable and stronger

Increased liquidity, as the buyer has the potential to extend payment terms without harming the financial stability of the supplier.

The supply chain can become more resilient during uncertain times as key suppliers have greater financial security.

In addition, suppliers who receive fast payment can maintain a healthy financial base and therefore provide consistent service to the buyer.

Conclusion

SCF seeks to improve the company’s performance in three aspects: growth, profitability and capital utilization. In addition, as we have seen, Supply Chain Finance reduces the Need for Working Capital and the level of indebtedness. If we were to summarize, we could say that Supply Chain Finance is concerned with creating value throughout the supply chain, ensuring win-win relationships that are sustainable especially in the long run.

What is Supply Chain Financing?