What is Supply Chain Finance?
Supply chain finance (SCF) is a concept that has been developing since roughly the 1990s, although it is becoming increasingly more relevant in today’s market
The term supply chain finance can be applied to many different activities within a bank or in the market as a whole. There isn’t an exact definition.
Banks market this product as a way of better managing a corporate’s working capital. Working capital – the money the company has in its accounts to pay general day-to-day expenses – is a key concern in today’s market.
It also means that banks are financing more than just one transaction/one export contract (as is the case with LCs). Instead, they are looking to support the continuing flow of goods.
Many banks have introduced supply chain finance programmes, based broadly around these concepts:
Supplier finance programmes: These leverage on the high rating of the buyer: the small suppliers to the larger, more credit-worthy, corporate can opt to get their 30-day/60-day/90-day invoices paid earlier (at a cost payable to the bank), or wait to the due date for payment.
These programmes aim to help the larger buyer and the suppliers manage their working capital efficiently.
Large buyers can take advantage of extra time to pay their suppliers, while the smaller suppliers access money quicker, rather than having it tied up in unpaid invoices.
Buyer finance programmes: These work in reverse: the bank extends banking facilities to buyers to finance imports from the exporter. It is then repaid on the due date by the buyers.
The benefits of this scheme is that it helps ensure the supplier gets paid, and helps manage its balance sheet by reducing its days sales outstanding (DSO). It can also help win importing clients who want to import a certain product, but lack access to enough liquidity.