What is Supply Chain Finance?Anne MacRae2016-06-13T04:08:44+00:00
What Is Supply Chain Finance
Globally Recognition: Supply Chain Finance Company
A interesting report was recently prepared by Aite Group (an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry).
In February 2014, the Association of Chartered Certified Accountants (ACCA) Global Forum for SMEs cited supply chain finance as “one of the most promising tools for financing small businesses around the world”, and noted that there was significant potential for further innovation in the sector – which currently makes up only 4% of the global receivables financing market (ACCA 2014).
The report was commissioned as part of ACCA’s commitment to the promotion of supply chain finance at the global level. Some of the information below was quoted from that report – specifically as it pertains to reverse factoring.
Why Supply Chain Financing Services?
Larger buying organizations are much more sensitive to the inherent risks within (and the resilience of) their supply chains. Important components are frequently dependent on third-party suppliers. For company executives focusing on profitable growth, working capital control has become one of the key issues. Working capital represents the amount of day-by-day operating liquidity available to a business.
“Supply chain finance can be defined (EBA 2013) as the use of financial instruments, practices and technologies for optimizing the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners.” So, Supply Chain Finance is not a product unto itself, but a group of products that are a means to an end. And each of these products will have a particular appeal to the different participants in the process. But which product is right for which situation?
Umbrella of Services Offered
The financing products that fall under the Supply Chain Finance umbrella are (but are not limited to):
Reverse Factoring (also called Approved Payables Finance):
allows a supplier to receive a discounted payment of an invoice due to be paid by a buyer (i.e. an account payable). The buyer approves the invoice for payment and financing is provided by through a third-party financier, who relies on the creditworthiness of the buyer. The buyer pays at the normal (or another, mutually agreed) invoice due date, whereas the supplier receives a discounted payment through the financing facility. Because it is the ordering party – usually a large company with a high-quality credit rating – that starts the process, it is that party’s liability that is engaged and therefore the interest applied for the deduction is often less than the one the supplier would have obtained on its own account.
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Accounts Receivable Factoring:
allows a supplier to receive a discounted payments from one or several of its’ buyers (i.e. the supplier’s account receivable). The supplier submits the accounts receivable to the financier, who provides an advances of anywhere from 65% to 90% of the face-value of the invoices. The balance of 10% to 35% is known as the reserve and is held by the financier until the buyers make payment on the invoices. The financier then collects the full value of the invoice directly from the buyer, and then releases the reserve (less the factoring fee) to the supplier. This is also sometimes referred to as invoice factoring.
Purchase Order (P.O.) Financing:
both Traditional Factoring and Reverse Factoring are post-delivery forms of Supply Chain Financing – the financing of receivables/payables after supplier had delivered products to, and/or completed services for the buyer. But what if financing is required in advance of delivery? Because there is a performance component that has been brought into the process, P.O. Financing is a little riskier and a little more difficult to put in place. The buyer issues a purchase order to the supplier. The supplier requires capital to purchase the products or materials form their suppliers, then manufacture, or re-package the product, then deliver to the buyer. It is only at this point of delivery when invoicing takes place and either Factoring or Reverse Factoring takes over. A few financiers will offer P.O. Financing as part of an all-in solution by advancing 25% to 50% of the purchase order value to the supplier; thus providing the capital they need to secure the product. Upon delivery and invoicing, the financier makes a second advance to the supplier (bringing the total up to the 65% to 90% level mentioned earlier in Traditional Factoring). Now a Traditional Factoring replaces the P.O. Financing and the solution is seamless to the client (supplier).