The Role of Trade Finance in Working Capital Liquidity.
From the liquidity perspective, supply
chain financing offers funding to
participants at every stage on the supply
chain at rates achievable by the strongest
credit. Depending on where the strongest
credit sits in the supply chain, this can
be customer or supplier finance, or a
combination of the two. It also supports
entities within a supply chain which may
have difficulty in accessing financing at
all. Establishing reliable and lower-cost
funding streams along the supply chain
minimises the risk of disruption at every
stage. The result is that each participant
can then rely on input from its suppliers at
every stage, potentially allowing them to
operate with lower inventory levels and,
therefore, costs. Ultimately more reliable
and cheaper funding should result in a
cheaper end product.
Risk management.
When managing risk, viewing the supply
chain as a whole does change every
participant’s perspective. Instead of
viewing each supply chain transaction
as a risk to be managed, the two entities
can work together to their mutual benefit.
Supply chain financing techniques
typically involve the sharing of information
about invoices and involve company
representatives taking a more proactive
part in its suppliers’ activities to ensure
they deliver what is needed. Linking the
supply chain together through financing
structures fundamentally changes the
nature of that supply chain. The stronger
credit provides a financial commitment
to the weaker ones, allowing the weaker
ones to invest for the future.
Enhancing sales.
Finally, a customer financing programme
can certainly help companies to enhance
their sales, especially when their customers
have difficulty accessing finance.
At first sight there would seem to be few
disadvantages to the concept of supply chain
finance. Companies need security of inputs
at a price they can afford. They also need to
ensure their customers stay in business to be
able to pay. There are potential benefits for
the customers and suppliers of the stronger
credit too – they get access to cheaper, more
reliable funds, and a stronger relationship
along their supply chain.
Yet there are some criticisms. Some
stronger companies consider the best way
to cut costs is simply to put pressure on their
suppliers to produce inputs more cheaply.
This is most common where the strongest
company in the chain retails to consumers,
has a significant market share, and is not
over-dependent on any one supplier (allowing
it to dictate terms to smaller suppliers).
More generally, parties should always
consider potential disadvantages before
offering, or participating in, a supply chain
finance programme. These include:
Internal effects.
There will be an impact on both the
accounts payable and accounts receivable
departments within an organisation.
Where a company is extending credit to its
customers for longer periods, the accounts
receivable team will incur cost managing
counterparty risk. On the accounts
payable side, there will be additional
processing costs from accepting suppliers
into the programme or as suppliers
make enquiries about the programme.
These relationships will also need to
be managed. Careful structuring of the
programme will be needed, to ensure that
accounts payable are not reclassified by
the auditors as loan finance.
Reduced access to formal financing.
Suppliers participating in a supply chain
finance programme will find it more difficult
to access more formal financing from
banks or other finance providers. This may
not be a problem for a company seeking to
expand through its existing relationships,
but it may make arranging finance to
support a new project difficult. This is
because the most liquid assets will already
be committed to the existing programme.
Over-dependence on strong credit.
Suppliers, in particular, can be sceptical
about the benefits of tying themselves
into a particular customer, especially