Supply Chain Financing, Good thing or Bad thing?
Large corporates (Buyers) have extended and complex supply chains. They are very much reliant on their suppliers for thousands of parts or services. Any disruption within their supply chain could put a stop to production or delivery of service, which ultimately has catastrophic impact to their financials and reputation.
Suppliers, most of whom are SMEs, today are trapped in a double credit crunch between large corporates who delay payment to suppliers up to 90 days and banks who have stricter lending.
For suppliers to fulfil orders from their large corporate customers, cash is required up front to cover initial costs e.g. paying for supplies, salaries and other overheads. Once goods or services have been delivered, these suppliers typically do not get paid till 60, 90 or even 120 days later. In fact, 41.5% of the total value of invoices in Singapore remain unpaid as of due date.
On the other side of the squeeze, banks are ever more conservative with their credit models and coupled with additional stringent banking regulations, credit is not as cheap nor as accessible in today’s environment. As a result SMEs are finding it increasingly difficult to obtain financing from the traditional banks. A survey by the Asian Development bank reported a 50% rejection rate in SME trade finance applications.
Supply Chain Financing (SCF) can assist suppliers of large corporates with access to early payment on their outstanding invoices. Suppliers also enjoy lower financing costs as pricing is based on the large corporates’ favourable credit profile and not that of the supplier. On the other hand, SCF also helps unlock liquidity in large corporates and mitigate risks in its supply chain. SCF delivers a win-win for all.
Benefits to large corporate
• Optimise working capital: SCF allows large corporates to extend their DPO (Days Payable Outstanding) thereby enhancing its working capital position, providing it a source of cash because the company is taking longer to pay its invoices.
• Reduce operational costs: Decrease in the number of supplier queries resulting from payment processes become more streamlined
• Reduce supply chain risks: Key suppliers have greater financial certainty and stability and are therefore in a better position to fulfil orders on time and maintain continuous supply
• Opportunity to negotiate better prices and extend payment terms: Assisting suppliers with cash for goods or services upfront gives the large corporate a relationship advantage and therefore places the buyer in a position to negotiate discounts from its suppliers
Benefits to supplier
• Optimise working capital: Reduce DSO (Days Sales Outstanding). Acceleration of cash conversion cycle releases working capital tied up in supporting sales. This also reduces the cost of carrying receivables (cost of providing credit to its customer).
• Improve cash flow management/forecasting: Predictability over timing of invoice settlement by SCF provider
• Potential to increase sales: The faster a company collects cash, the faster it can reinvest that cash to make more sales and grow its business.
• Easy access to financing: No impact to credit rating or ability to obtain other types of financing
• Reduce operational costs: Outsource credit administration and receivables collection and management
How does SCF work?
A large corporate (Buyer) enters into a SCF arrangement with a financier who agrees to offer early payment to its Suppliers for invoiced goods and services.
Financier is notified by the Buyer that an invoice is approved for payment.
Financier then offers immediate payment to the supplier, knowing the invoice will be paid by the Buyer.
On settlement date, the Buyer pays the full invoice amount due to the Financier.
SCF benefits both Buyers and Suppliers, providing financial security and predictability in a strong partnership. For the Buyer, the increased robustness of the supply chain facilitates stability and profitability. For Suppliers, cash received today rather than later provides the potential for business growth.
Nalinee Chinowuthichai & Brian Teng are the co-founder of InvoiceInterchange, Singapore’s first invoice trading platform, where SMEs can flexibly manage their cash flow by selling invoices to a network of investors who compete to provide cash advances.