Chapter 7 Trade financing techniques
Advantages
There are a number of advantages for a
company to extend finance along its supply
chain.
There are significant cash flow benefits
to all participants. The strongest credits
will still have access to bank and other
external funding when markets reduce the
availability of liquidity to weaker credits.
By exchanging information on approved
invoices, all participants have greater
visibility along the supply chain. This builds
trust between all the participants and allows
for disputes to be resolved more quickly.
Together, this helps to reduce the trade
risks associated with the transaction.
Because the flow of information is
improved, all participants can manage
their cash flows more efficiently. Suppliers
can anticipate more accurately when
they can expect payment from their
customers. In the case of participation in
the programme, the suppliers will be able
to arrange payment usually within two
or three days of submitting an invoice.
Whether they choose to participate or not,
the suppliers only need to participate in
the supply chain finance programme when
it suits them, not as a precaution.
The buying company has greater
confidence that its suppliers will have
access to liquidity, helping to minimise the
risk of supplier insolvency.
Because this financing is arranged on
invoices, suppliers are free to use other
assets to secure other borrowings,
potentially a more efficient use of assets.
The buying company may also be able to
amend its purchase contract terms so as
to improve its own working capital position
or pricing.
In accounting terms, the supplier can
achieve cash earlier than normal, and
record that as settlement of a receivable
rather than as new borrowings
Finally, these improved efficiencies
will result in more efficient production,
improving the product’s competitiveness
in the end market. Fewer resources need
to be set aside to manage risk. Working
capital funding at almost every stage will
be cheaper.Disadvantages
As with any other form of financing, there
are disadvantages to the use of supply chain
finance.
Participants may face a significant initial
set-up cost, although this may be reduced
if technology changes are included as
part of a wider project.
Suppliers may be nervous about
committing to a financing structure
operated by a core customer, especially
when they have limited access to other
sources of finance. They may be wary
of sharing too much information with
their counterparts, and be suspicious
that once they are tied into the structure,
the customer will try to negotiate further
discounts in price.
The buying company will need to take
care when establishing the structure to
ensure that its trade creditors are not
reclassified as a debt to the financier.
The company sponsoring the structure
may find it more difficult to raise other
finance, as some of its credit capacity
in the market will be used up in
effectively supporting finance provided
to other entities.Evaluation
As long as all parties are happy with the
concept of supply chain finance and its
requirement for sharing information, it can
provide a significant number of benefits for
all participants.
For a programme to be successful, there
must be an established trading relationship
between both parties. Both parties must feel
confident that the structure is in their mutual
interest, in both the short and longer terms.
If structured appropriately, a supply chain
finance programme will improve liquidity
along the supply chain, mitigate risk between
the participating parties and enhance sales
indirectly via a more efficient use of financial
resources in the production process.
As a theoretical concept, supply chain
finance should be attractive to all parties
involved. Although the number of supply
chain finance programmes continues to grow,
overall the take-up remains relatively low.
When programmes have been established, it