SUPPLY CHAIN FINANCE - REINVENTED
Supply chain finance (SCF) looks at the cost of capital and capital commitment across the supply chain. It involves short-term financing, often combined with technology-based solutions and efficient financial processes between supply chain participants.
Minimizing tied-up liquidity and financing risk as well as more favorable financing conditions (lower capital costs) are the motivations for optimization through supply chain finance.
Supply chain finance tools are also referred to as supplier financing or reverse factoring.
Supply chain finance is usually initiated by the buyer, who often has the better credit rating and thus access to better conditions from banks and specialized service providers.
Characteristics and Process
In “dynamic discounting”, the buyer finances the seller directly. In return, he receives a discount or a lower purchase price.
Alternatively, the buyer finances himself with a bank or financial services provider. The seller receives his money faster but has to accept a discount. The buyer benefits from longer payment terms and/or lower prices from the seller.
A simplified process flow:
- The seller will issue the invoice to the buyer.
- The buyer will review the invoice and will remit the funds to the seller minus a discount.
- In the background, the buyer will submit the supplier invoices to a bank or service provider for reverse factoring and will be financed by this over an agreed period.
How Sensible is Supply Chain Finance?
Low interest rates and a stable global economy generally invite more risk taking:
- If the difference between the interest rates at which a buyer can refinance the trade value and the interest rates at which a seller can access the capital market is large, then supply chain financing can make perfect sense. However, with comparable refinancing costs, there is a distinct advantage on the buyer’s side in this type of financing, often to the financial detriment of the seller.
- Contracts in supply chain finance are often very complex and require the involvement of several parties: the seller, the technical service provider, a bank or financial services provider, a rating agency for credit assessment and an auditor who audits the transaction.
- Buyer creditworthiness, timespans of global trade transactions, currency risk, and legal certainty across geographies have a direct impact on the seller’s financing costs.
- Balance sheet implications of the various supply chain tools can have a significant impact on company valuation and creditworthiness if used improperly.
Supply Chain Finance vs. Cargodian.Trade
Supply chain finance is the preferred choice of trade finance for financially strong buyers, but often at the expense of the seller (supplier). Complex contracts lead to effort for all parties involved. The desired automation requires technical modifications. Necessary credit checks lead to further costs and considerable effort.
Cargodian.Trade is easy to use and transparent. With Cargodian.Trade, payment security is increased for the seller, and the buyer has high delivery security. The cost of Cargodian.Trade is highly attractive compared to the total cost of other solutions.