Supply chain finance (SCF) should be ‘business as usual’ for every major company with a supply chain, especially if it has supply chains around the world. This is because it’s a ‘win-win’ for both buyers and suppliers, treasurers heard at an ACT breakfast update that took place in London on 22 May.
At the event, which was held under the Chatham House Rule, treasurers were told that SCF helps suppliers by freeing up their working capital and providing them with cheaper funding that is based on their buyer’s credit quality. SCF also makes credit insurance redundant and is an efficient way of lending to SMEs, which still find it harder to access finance than larger companies.
Buyers benefit from SCF because they have more resilient supply chains at zero cost. In addition, SCF is a good incentive to get suppliers to agree to extended payment terms, which then improves the buyer’s working capital.
With SCF, the buyer approves an invoice from the supplier and the invoice is then submitted to the bank for payment. The bank will make funds available to the supplier to draw down at any time between the invoice being approved and the original date when it was due. If the supplier draws down on the funds before the invoice was due, they will pay interest to the bank at a competitive rate due to the fact their buyer is a good credit.
There are costs associated with SCF that arise from investment in management time and system upgrades. When embarking on an SCF project, it is a good idea to bring finance, procurement and IT together at the start in order to agree a plan, delegates heard. Companies that want to move large numbers of suppliers onto SCF will benefit from having an e-invoicing system. But it is possible to keep SCF a simple, manual process and just use it for a limited number of high-value suppliers who submit a small number of invoices – in other words, the ‘low-hanging fruit’.
Delegates learned that it is important to have a good communication strategy in place for explaining SCF to their suppliers as well as other stakeholders, such as procurement. SCF is not just about improving working capital; it also enables process improvement and stronger relationships between buyers and suppliers.
Sally Percy is editor of The Treasurer