Numerous economic pressures are forcing businesses to examine how they can improve working capital and access cash trapped in the balance sheet.
From rising interest rate pressure to the need to free up internal funding to support new initiatives, working capital has become a top-of-mind issue for executives. But simply lengthening payment terms, the knee-jerk reaction at many companies, is not a sustainable solution to solving working capital issues. Today’s procurement and finance leaders are looking at innovative ways to liberate cash through emerging financing and technological tools.
Key among these strategies is a renewed focus on supply chain financing (SCF). This established funding mechanism recently has become more accessible to mid-sized organizations. The appeal of a new focus on SCF lies in the fact that it offers several benefits to both buying organizations and their suppliers.
Defining supply chain finance
Put very simply, supply chain finance is a buyer-led process that allows suppliers to sell their invoices to a third party at a discount upon approval. They use the buying organization’s payables commitment and credit rating to guarantee early payment.
With SCF, suppliers are able to access attractive financing capabilities that would normally be inaccessible without cooperation from the buyer. Suppliers get access to prompt payment at favorable rates. Buyers get to pay on their preferred terms without causing undue burden on their suppliers. The result is improved working capital for both parties.
Sometimes referred to as payables financing, SCF is not factoring. Factoring is receivables financing, where a business sells its invoices to a third party at a discount, without the involvement of a buying organization. SCF has existed for quite some time. Initially, providers were mainly large banks. Before the advent of today’s fintech platforms and providers, this mode of funding was mainly available to enterprise-size companies.
With the rise of e-invoicing and P2P solutions, SCF has become a viable option for mid-market companies, with revenues between $100 million and $1 billion. Additionally, where banks in the past have dealt almost exclusively with Finance, third-party SCF providers today understand that Procurement and Accounts Payable are also essential stakeholders. A 2017 PwC paper, “Understanding Supply Chain Finance,” notes that the most successful SCF programs “bridge the functional gaps and align the organization to a common Procure-to-Pay strategy.”
Benefits of Supply Chain Finance
Proof that SCF is gaining traction in the business community is evidenced by the numbers. The World Supply Chain Finance Report 2018 notes that the market for supply chain finance grew by 36% in volume in 2016 compared to 2015, reaching $447 billion. Meanwhile, the amount of funds in use at the end of 2016 is estimated at $167 billion, an increase of 43%.
Companies are beginning to understand how beneficial SCF is to their working capital and cash flow. The 2017 PwC paper notes the reasons companies give for implementing this funding source include:
- Working capital optimization – 42%
- Supplier liquidity needs – 18%
- Supplier relationship improvement – 18%
- Supply chain stability improvement – 12%
There are few instances in business that provide a win-win for both buyers and sellers…supply chain finance is definitely one that companies should consider when searching for ways to unlock the cash trapped in their supply chain.
Discover how our supply chain financing gives suppliers the option to get paid early on invoices – typically as soon as an invoice has been approved by a buyer.