Jan 19, 2021
The Supply Chain Finance Umbrella

Supply Chain Finance is known to exist since early 1800 as a widely accepted commercial-payments activity. By definition, Supply Chain Finance (SCF) is the use of financial instruments, practices, and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners.

Phew!! If the above definition has jumbled your thoughts on what little you knew about Supply Chain Finance, then let me make it simpler.

A typical manufacturing or trading organisation will always have vendor payments as their Payables and buyer repayments as their Receivables. SCF as a tool and methodology benefits the entire ecosystem by enabling Buyers to buy inventory (goods or services) by extending payments terms, while on the other side improves certainty on forward orders and payments for their Suppliers.

In this article, we will focus on transactions marked in the pictorial above as Initiated by Buyer. Traditional Supply Chain Finances typically worked with 3 participants

  • Corporate Buyer
  • Vendors and Suppliers
  • Bank/NBFC (Financier)

  • Under the above arrangement vendors/suppliers to the corporate are on-boarded in the program. As a start a corporate buyer, extends such a program only to their creditworthy vendors instead of their overall supply chain.

    Once the supplier has dispatched materials in line with the order and the corporate buyer accepts the same; the bank/NBFC is notified to provide discounting to vendor by making payments in-place of the Buyer. In exchange of receiving payments on an earlier date supplier may extend a cash discount or efficiency in the product cost as mutually agreed between them and the buyer.

    Suppliers are generally willing to accept this trade-off because the rate of financing offered to them is based off the credit worthiness of the buyer. Given that traditional SCF is based on the credit of the buyer, it tends to work most effectively when the buyer has a higher credit rating than the supplier. Resultantly, the rate of financing available through the financial institution is attractive to the supplier.

    Cut to, modern day Supply Chain Finance which includes some old plus new participants and practices making the overall process dynamic yet more inclusive in nature. The entry of fintech(s) with their technology platforms has created a different level of excitement in the overall ecosystem.

    McKinsey in their 2020 Global Payments Report mentioned that Total Trade and SCF Turnover financed assets were in excess of $7.3 Tn. Off this documentary business and Seller Side Finance business contributed to $3.8 Tn and $3.0Tn respectively. While Buyer Led/reverse factoring had its share limited at $0.4Tn, but what pleasantly surprising was the expected CAGR (2019-24) of 15-20%. This is largely driven by technology platforms that facilitate financing on the basis of buyer-approved invoices.

    Dynamic Discounting (DD) has caught attention since its introduction and it proved to be a fantastic SCF solution during the Covid period, as lender operations, facility renewals and disbursals got affected due to nationwide lockdowns. The product as an overall offering has an immense growth opportunity given its flexibility to roll-out and accommodate more suppliers, short implementation time and ability to manage variations in payments terms between buyers and suppliers directly. DD is often self-funded, meaning the buyer uses their own available cash (corporate treasury) to pay suppliers directly. This makes DD a great solution offered fintech firms because they do not require the participation of a bank or financing institution. Corporates are showing keenness to adapt DD given the acceptance of drop in DPO in exchange of receiving early payment discounts.

    We see manufacturing and procurement centric companies giving DD a flavour of supplier attraction and using it as a tool to increase interdependency. They realise its underlying benefit with available cash when put to finance their procurement is largely valuable for firms as the returns available through discounted invoices are just as high if not higher than what they could generate through alternative investment opportunities in the market.

    SCF blend - An organic extension of Dynamic Discounting could be melding it with another approach to ensure corporates with limited cash on hand can also finance their supply chains. This is by bringing banks and funders into the transaction to participate for a certain portion of a corporates supply chain. This solution works great when suppliers are divided in the order of their dependency and payment priority. The quantum and frequency of payments could also be a selection category for vendors. The overall program (however it is structured), both programs are run centrally over the same platform and use the same set of interfaces. In this way, we see Buyer corporates can manage supplier financing operations for their entire supply chain through a single solution, even if different financing programs are used for different groups of suppliers. The availability such solutions allows buyers to benefit from a supply chain finance program without having to overcommit on funding or rely too exclusively on 3rd party funders.

    Finovate Capital is a new age fintech and our platform is specifically designed for Banks and NBFC’s looking for diversify their deployment channels outside their existing client base through a hassle-free and efficient method. Our platform is built to support robust quality control mechanism, various structuring process along with fraud control blockchain. We provide access to Supply Chain Finance deals across various growing industries with a focus on emerging as well as new age corporates.

    Pavan Matai