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Supply Chain Finance: Moving from Concept to Implementation

The growth of supply chain financing (SCF) has accelerated in response to continued credit and liquidity challenges in today’s market. As more companies adopt SCF programs, the dialog has moved from conceptual solution to fast and practical implementation.

This article reviews SCF in light of current market challenges around working capital and related risk issues and:

• Offers a practitioners’ guide to implementing a SCF program;

• Describes the SCF value proposition—measurable financial value and strategic benefits; and

• Highlights considerations in choosing a banking partner.

The challenge

Working capital as supply chain vulnerability
Access to capital continues to be severely limited in a tight credit environment. The cost of financing is at a premium, even while supply chains are intensifying efforts to reduce costs, given stalled revenue growth in the current global recession. Despite speculation of a resurgence in the use of letters of credit (LCs), anecdotal evidence suggests a continued migration to open account—driven in part by cost-reduction efforts.

A SCF program requires customized solutions tailored to a buyer's business systems and processes.

In the current business climate, counterparty risk remains a major concern. The failure of a trading partner can disrupt an entire supply chain. Adverse economic conditions have underscored that a supply chain is only as financially strong as its weakest link.

Working capital is front and center for risk-conscious buyers. It is in a buyer’s best interest that its strategic suppliers remain financially strong. Buyers want to increase transparency around the financial condition of strategic suppliers. Suppliers want to reduce customer risk related to receivables, with the ability to liquidate receivables to satisfy working capital needs and to manage their credit risk exposure to buyers.

Before the financial crisis and recession, buyers were more likely to press vendors to extend payment terms—as a form of interest-free loan—with less concern over the impact to a suppliers working capital requirements. Today companies recognize the value of a collaborative approach that addresses the needs of both trading partners when negotiating payment terms and other drivers of working capital. Access to affordable financing is proving critical to managing counterparty risk and ensuring continued supply chain viability.

The solution

Supply chain financing—a collaborative approach
Against this backdrop, the popularity of SCF for domestic and cross-border procurement is accelerating. The solution allows a seller to liquidate receivables early at an attractive interest rate—by discounting an invoice or draft through a bank as third party—and a buyer to extend its payment terms.

A buyer-backed program leverages a buyer’s credit strength to lower the cost of funding for its strategic suppliers. This allows a buyer to extend payment terms without negatively impacting sellers, who can borrow at lower rates under the program and gain access to immediate liquidity.

The solution provides access to affordable liquidity to ensure a supply chain’s ongoing viability and to lower its overall cost of funding. This reflects a collaborative approach, since it addresses the working capital needs of buyers and sellers.

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