Who within a ‘user’ organisation is required to agree, approve, implement and operate supply chain finance? Which external groups will be involved? And who is taking an interest in whether and how SCF is implemented?
SCF (by which we mean any approach that allows financing up or down the supply chain) has developed from a number of traditional financing approaches, the increasing use of electronic data exchange and the emergence of alternative sources of finance. Consequently, there are many existing terms and jargon which may confuse or complicate.
As an example, the pros and cons of letters of credit (LoC) vs bank payment obligations (BPO) may be clear to someone with a trade finance background but less clear to an SME discussing early payment terms with suppliers and customers who are just ‘round the corner’. Having a view on who you might meet should help prepare you for your journey through SCF.
We have identified a number of key parties and stakeholders:
- Corporate and public sector users
- Logistics service providers
- Financial service providers
- SCF platform providers
- Professional advisers
- Industry and professional associations
1. Corporate and public sector users
Trading between individuals or organisations is defined by buyer-supplier relationships, including the arrangements for payment, and so these parties are the ‘users’ of SCF. Depending on industry, local custom and relative negotiating power, these arrangements can vary considerably.
The buyers’ and suppliers’ boards of directors are involved as working capital includes supplier payments and customer financing, both of which may be part of an SCF programme. In addition, boards who take a strategic approach to their supply chain increasingly focus on the financing of the whole supply chain and the risk, especially financial risk, of the participants.
Within the company SCF impacts a number of functions:
- Procurement (or purchasing or supplier relationship management) identifies requirements for goods or services, then plans, implements and reviews supply agreements, incorporating SCF into the negotiations.
- For those in sales, looking at customers’ financing needs has long been an opportunity to provide supplier finance, particularly for high-cost or capital-intensive items.
- Supply chain (or operations or logistics) plans and manages production and distribution and wants suppliers to see it as a priority customer so that suppliers deliver way beyond the contracted levels of service. This can be driven by their experience of how and when they are paid. At the other end of the scale, delay and uncertainty as to when a supplier will receive its cash can lead to poor service, delayed deliveries and even to a supplier failure.
- Finance has to decide on the appropriate financial controls for SCF, as well as the accounting and internal reporting of the transactions and the changed roles and responsibilities.
- Treasury manages the overall business financial liquidity and so is involved in SCF:
- If the SCF programme is self-funded, the business commits its own cash, altering the long-term cash requirements, removing cash from the immediately available cash pool and also changing the company’s credit or risk position.
- With external financing, a third party funds SCF. While this may positively benefit the cash balances available to the business, it does also impact the overall business credit and risk profile.
- Legal is often involved in planning and implementing the changes required to contracts.
- IT has to ensure the SCF information is available, formatted, and transmitted in a secure and timely fashion.
2. Logistics service providers
Increasingly, logistics service providers (LSPs) go beyond simply transporting product, providing additional services covering planning, warehousing, maintenance, insurance, customs management and inventory finance. Some LSPs offer this SCF directly; in other situations they provide the transactional data to finance providers.
In some supply chains the LSP buys the goods from the manufacturer and becomes the interim owner during transport and in warehouses before selling them to the buyer, thus injecting external finance into the supply chain.
3. Financial service providers
Banks have traditionally financed individual organisations in the supply chain, including lending against invoices in the form of factoring and invoice discounting. These relationships can be challenged where organisations are being part-financed by their customers’ or suppliers’ SCF arrangements. However, banks have become major providers of SCF, some providing integrated finance and platform solutions while others provide funds to the SCF platform providers, described below.
Many credit card providers have corporate purchasing cards for businesses to pay, typically, for small value items. The effect is to deliver a number of the benefits of SCF – particularly prompt and early payment to suppliers – while offering the customer a delayed payment, often a monthly settlement.
There are an emerging group of new entrants with alternative financial backing, sometimes built on non-bank funding models, such as peer lending and crowd-funding. These are also often linked to, or are part of, a platform or hub offering.
4. SCF platforms
A whole range of service providers have emerged offering a system or set of electronic tools to support SCF. In fact, in a number of studies, electronic exchange of information is seen as a requirement for SCF.
- Providers of enterprise resource planning (ERP) software are introducing SCF capabilities alongside their existing integration services and purchasing and selling tools.
- Niche software providers are also adding SCF capabilities, including those focussing on electronic invoicing, payment systems, real-time event tracking or inventory visibility.
- We should also include those who have come from a trade documentation background, such as those systems that manage letters of credit, customs, bills of lading, etc.
- Some suppliers offer ‘hubs’ which usually have a common set of interfaces and data definitions which allow an organisation to link once with a hub and communicate with many buyers or suppliers without having to implement multiple or ‘many-to-many’ interfaces.
Specialist consultancies can advise on the credit, risk and accounting opportunities and challenges. Larger generalist consultancies have more multi-functional skills and can often provide local support in many countries.
6. Professional advisers
Changes to existing supplier or customer terms and conditions require legal advice and support, especially complex if the programme is multi-national. Similarly, it is important to get professional advice from auditors to confirm the right approach because the classification of the amounts outstanding could be moved from accounts payable to debt, thus impacting the balance sheet.
7. Industry and professional associations
Industry groups are bringing together experts to develop standards.
- The Euro Banking Association (EBA) published the second edition of its Supply Chain Finance EBA Market Guide in 2014 and has developed standards for electronic invoices.
- The Bankers Association for Finance and Trade, a US-based association, has published terms and definitions for trade finance and for supply chain finance techniques.
- The International Chamber of Commerce (ICC) created the industry standards for traditional documentary trade finance instruments and recently further developed them for SCF.
Professional associations representing accountants, treasurers, procurement, logisticians and lawyers have started including SCF in their news reports, conferences and education events.
8. Governments and international agencies
Governments and international institutions get involved to:
- shorten cash cycle times to encourage growth and investment;
- improve the financing of small and medium-sized enterprises (SMEs);
- encourage exports; and
- support developing countries’ economies.
For example, the Dutch Ministry for Economic Affairs supports and subsidises Betaal Me Nu (Pay Me Now) to provide additional liquidity to SMEs through faster payments or financing.
In the UK, an early SCF initiative was sponsored by the coalition government in 2012.
SCF can mitigate long export payment terms while the physical product is shipped abroad. The US Ex-Im bank, for example, launched a supply chain finance guarantee programme.
To support less-developed economies, the International Finance Corporation (IFC) part of the World Bank the Global Trade Supplier Finance (GTSF) programme in 2010 to provide short-term finance to emerging market suppliers and small- and medium-sized exporters, “helping to address a huge shortfall in supply chain finance,” the IFC said at the time.
But the way public authorities regulate and tax payments, interest, debts and credits and control capital can have a major impact on the practical implications of SCF in each country.
A number of universities and business schools conduct research into SCF and run courses for under- and post-graduates.
Existing and new organisations are building direct experience, skills and capabilities in SCF. Governments, as well as industry, trade and professional organisations and educational establishments are engaging with SCF. This is all leading to wider understanding and an emerging set of common definitions and standards for SCF.
- Charles Findlay is the co-author, along with Simon Templar and Erik Hofmann, of Financing the End-to-End Supply Chain: A reference guide to supply chain finance, published by Kogan Page. Readers of SCF Briefing may order the book at a 20% discount by using the discount code SCFB16.
- Read our review of this book here.