The term ‘supply chain finance’ itself is used in various ways within the industry. In this guide we present the components of the SCF solution and how they can contribute to a flexible financing strategy:
Purchase Order Commitment to Pay
The buyer’s bank issues its commitment to pay the seller (at sight or upon maturity) once the seller ships and makes available the required documents that match the Purchase Order. Various covenants may also apply.
Pre-Shipment Finance
Pre-shipment finance (or Purchase Order financing) is made available to a seller based on a purchase order received from the buyer. This financing can cover all the necessary working capital needs of the seller (including raw materials, wages, packing costs and other pre-shipment expenses).
Warehouse Finance
Warehousing financing is a form of trade finance in which goods are held in a warehouse for the buyer, usually by the seller (or a 3rd-party), until needed.
Post-Shipment Finance
Post-shipment financing is provided to a seller using the receivables as collateral. The seller presents shipping documents as evidence of a receivable while the bank may also require a bill drawn on the buyer for goods exported.
More information may be obtained from another article of ReplayBusiness.com named:’Export Collections Financing: What does purchasing a bill mean?’:
Reverse Factoring or Receivables Purchase
Reverse factoring (i.e. approved payables financing) allows sellers to sell their receivables and/or drafts relating to a particular buyer (or many buyers) to a bank at a discount as soon as they are approved by the buyer. This allows the buyer to pay at normal invoice/draft-date and the seller to receive early payment. In this case the bank relies on the creditworthiness of the buyer. The discount is based upon seller credit standing.
More information about factoring may be obtained from another article of ReplayBusiness.com named: ‘Understanding Factoring is not brain surgery’
Buyer Finance
A post-shipment finance loan on the buyer can be arranged, to cover the period until the goods are sold. On invoice due date, a payment is made to the seller by the proceeds of this loan.
Letters of Credit (import/standby/export)
A letter of credit - L/C (or documentary credit – D/C) is a written undertaking by a bank (issuing bank), issued on the instructions of the buyer (applicant) to the seller (beneficiary), to effect payment under stated conditions. In this case, documents travel through the banking channel and do not follow the goods.
More information about L/Cs may be obtained from another article of ReplayBusiness.com named:’Types of Documentary Credits’
Forfaiting
Forfaiting is frequently used in the field of machinery and equipment, where there is a frequent demand from foreign buyers (mainly from developing economies) for deferred payment (up to the medium and long term). Any exporters that grant a deferred payment want to have their credit risk guaranteed. Forfaiting involves the purchasing of receivables (at a discount) from exporters. The forfaiter takes on all risks involved with the receivables.
More information about forfaiting may be obtained from another article of ReplayBusiness.com named 'International Supply Chain Financing: Let’s go for Forfaiting’
State-backed Receivables Finance
States, through their incentive packages and established export credit agencies, are partnering with exporters to mitigate cross-border risk in the supply chain. This type of State-backed receivables can be financed (at a discount) by the bank of the seller.
Confirming
If the seller has some doubt about the ability of the L/C opening bank (issuing bank) to arrange payment, he may request the buyer (opener of the L/C) to arrange for the L/C to be ‘confirmed’ by another bank (confirming bank), assuming the liability for payment, acceptance or negotiation of correctly presented documents under the L/C. In this case the confirming bank receives a confirmation commission (collected from the seller or is claimed from the issuing bank if so directed).
Asset-based Lending
A business loan secured by collateral (assets).
More information about this type of lending may be obtained from another article of ReplayBusiness.com named ‘Guide to SME Asset Based Finance’
Collections
The concept of ‘collection’ is a compromise between Open Account Trading (favouring the buyer) and Payment in Advance (favouring the seller). Trade settlement by collection reduces (1) risk to both importer and exporter (buyer and seller) (2) delay in receipt of payment by exporter (seller), by using banks as intermediaries to ‘collect’ payment from the importer (buyer) for goods which the exporter (seller) has already sent.
Payments
Payments initiation from all appropriate channels; monitoring payments; clearing and settling payments to the parties accounts at their respective banks. Payments tracking services.
Insurance
Supply chain insurance products are designed to help protect profits against a failure in the supply chain.
FX spots/forwards/options trading
In the spot FX, the physical exchange of the currency pair takes place right at the point of trade. An FX forward, is an agreement to buy or sell an amount of foreign currency at a specific price for settlement at a pre-determined future date. FX option is an arrangement in which a party acquires the right but not the obligation to buy or sell a specific amount of a currency on a fixed date and at a fixed rate. Such products are used as a hedge against exchange-rate fluctuations.
Credit Risk Management
Credit risk is a seller’s risk of loss arising from a buyer that does not make payments as promised. Credit risk management provides support in anticipating risky positions and avoiding default.
More information about credit risk management may be obtained from another article of ReplayBusiness.com named: ’Export Business: Things you can do to minimize the risk of failure’
Credit Insurance
Customer insolvency, bad debts, overdue accounts, commercial risks and political risks have to be taken into account when trading on credit terms. In the business-to-business transactions (B2B), customer credit is a fact of life. Credit insurance is the answer to helping companies manage their customer credit risk.
More information about credit insurance may be obtained from another article of ReplayBusiness.com named:’The Importance of Credit Insurance’
Supply Chain Finance (SCF) is one of the most exciting and promising products in the banking industry. It improves the financial efficiency of the supply chain and substantially reduces the working capital of both buyers and sellers. It creates a true win-win of all the parties involved (buyers-sellers-banks-insurance companies) as a very attractive tool for diversified funding sources. Technology will play an increasingly important role in the delivery of effective SCF solutions, both to automate the exchange of information between buyers-sellers-banks-insurance companies, but also to integrate the financial and physical supply chains.
