Supply Chain Finance in Practice

Supply Chain Finance (SCF) provides significant opportunities for both buyers and sellers. Technology plays an increasingly important role in the delivery of effective SCF solutions, both to automate the exchange of information between buyers, sellers and banks but also to integrate the physical supply chains. This leads to more efficient and timely financing, specifically adapted to the needs of each company.
In other articles of ReplayBusiness.com, we discussed the opportunities in the SCF from a bank’s perspective (http://www.replaybusiness.com/2013/03/opportunities-in-supply-chain-finance.html) and we presented a guide with the components of an integrated SCF solution (http://www.replaybusiness.com/2013/03/a-guide-to-trade-and-supply-chain.html).
In this article we mention some of the practical issues relating the financial supply chain such as costs, legal & accounting, bank, technology, etc. and we’ll present the benefits of SCF for buyers & sellers.
Costs: As long as the volumes are sufficient, SCF is (generally) set up without cost to the buyer. However, costs are paid by sellers which may include set-up fees, structuring costs, regulatory costs where applicable (i.e. stamp duties, withholding taxes, etc.), risk premium for credit risk, operational fees and management time. These costs are generally offset by improved financing terms for suppliers.
Bank considerations: Banks providing SCF solutions are concerned with the buyer-related risk. Some of these risks are: The jurisdiction in which the buyer is located, how to enforce buyer obligations to pay irrevocably the payments processed through the SCF structure, how to be recognized as a creditor (in case of the buyer’s insolvency), fraud events, etc.
Legal & Accounting issues: Companies need to review restrictive covenants in place with their existing banks to ensure that they have the right to enter into SCF transactions. Note that parties involved (buyers, sellers, banks) may have to report under different accounting principles where the requirements may vary.
The role of inter-departmental communication: The success of a SCF solution relies on significant interaction between departments (mainly finance and procurement). In many companies individual departments work (more-or-less) independently. Therefore there is little integration of information flows. Dealing with this issue requires significant management attention and investment in systems and business processes.
Technology: When setting up an SCF programme, the technology platform is important. Most platforms are web-based providing an easy-to-use, low-cost interface for buyer and suppliers, with little additional h/w or s/w requirement. Initially, the number of exceptions may be relatively high but this is likely to be resolved over time.
BENEFITS OF SCF FOR BUYERS: Working capital and free c/f improvements, supply chain stability, cost savings (i.e. lower invoice settlement costs, etc.). In situations where buyers are heavily reliant on key suppliers, SCF is a good financial tool to create an incentive for partnership.
BENEFITS OF SCF FOR SELLERS: Additional access to capital, favourable SCF rates compared to alternative financing options, transparency, improved cash-flow forecasting, off-balance sheet benefits, savings on costs and fees (i.e. automated payments, no commitment fees, abilities to match tenor and amount to exact needs, etc.).
Supply Chain Finance is recognized as a win-win arrangement which is designed in a way that all participants (buyers, sellers, banks) can profit from it in one way or the other.


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