|By Brown, Anthony|
Supply Chain Finance (SCF) is much in vogue as the finance technique du jour.
But what does it mean?
Is it reverse factoring?
International trade finance?
Or all of the above?
A broad definition of supply chain finance is best - the financing of self-liquidating transactions linked, to successive stages of domestic and cross-border supply chains. In other words, SCF is the financing of inventory and receivables relating to the processing of materials that are bought by manufacturers to make finished products, that are then sold by exporters to importers, that are then sold by importers to distributors, who then sell them to end buyers.
Business is changing and the earlier (and more often) a lender can add value in extended supply chains, the likelier they will be to win new and maintain existing clients.
Here we explore how lenders can use non-traditional financial solutions at various stages of supply chains to competitively differentiate and to simultaneously maximize their value proposition to clients. The main trends driving new product development in global commerce are included in the sidebar Befriending the Trends on page 20.
In today's globalized economy, any discussion about supply chains inevitably encompasses more than domestic trade. And that's good since global trade has generally grown faster than global production (see chart 1 above). This opens up huge opportunities for factors and asset-based lenders.
A combination of several facts augurs well for the future of receivables and payables financing in the West: The use of open account terms is most prevalent in the US and EU; at
The competition is about to heat up between players vying for this space - banks, factors, insurance companies, pension funds, hedge funds, IT platforms and, of course, corporates themselves.
Digital is the New Black
Much of the focus of trade financiers today is on how to make the availability of receivables, payables and inventory financing as efficient, streamlined, transparent and inexpensive as possible. Drivers for this are the increasing rate of adoption of electronic invoices and purchase orders (15-20% p.a.) and the use of B2B and bank trade platforms to transmit them and aggregate data. Liquidity providers, risk takers and logisticians are participating in these platforms to provide finance, protect against non-payment and provide transparency into the physical supply chain at multiple stages. This facilitates the provision of financing and risk management appropriate to visible "events," such as issuance of orders; receipt of raw materials; shipment, arrival, warehousing and delivery of finished goods, disputes, and so on.