SCF - the supplier viewpoint
It is 4.30am and the alarm has gone off again - super early and now the third day in a row.
Sanjay is in India. He is a member of the finance team of a large Indian factory supplying a well-known European brand - and he's getting up early because of supply chain finance.
His job is to manage liquidity for the company where he works. The company has shipped goods to its European customer and participates in a supply chain finance (SCF) program. Three days ago, he was notified that invoices were approved and eligible for early payment. The goods left the factory some 25 days ago - but the payment term is 90 days and so there are still 65 days remaining.
The SCF program is operated out of Hong Kong, several time zones to the East. Each morning, the SCF program resets and limits become available - and Sanjay wants to get his invoices funded so that cash arrives and there's no waiting for payment. Moreover, his CFO is a little nervous on the credit risk and the local bank has declined to advance funds against the invoices.
The SCF program is first-come, first-served - and each day only limited amounts of funding are available based on the facility limit and its overall utilisation across all suppliers. The last two days he missed the window to get his invoices discounted; available funds had run out by the time he was online. Today he hopes for better.
This is a true story with details changed - although not all SCF programs are designed this way.
This post sets out some of the positives and negatives of supply chain finance from a supplier point of view. A supplier-centric program is a win-win for all the parties involved.
Why supply chain finance?
Many larger companies have set up supply chain finance programs ("SCF") for their larger suppliers.
These are "win-win" arrangements where:
suppliers can access pre-arranged funding at low cost against the invoices that their corporate customer owes; whilst
the corporate customer is able to:
more reliably benefit from trade credit provided by suppliers, even lengthening their invoice terms and generating working capital, and
help suppliers with liquidity support, making supply chains more robust
Corporates that use PrimaTrade gain additional wins - for example:
For the supplier - payments at shipment instead of after delivery and real-time, digital communication with the accounts payable team at their customer, whether or not they are taking early payment;
For the customer - additional P&L benefits via early payment discounts, automation wins for accounts-payable teams and the ability to invite all suppliers into the SCF program supported by multiple funders.
What do suppliers want from SCF?
Suppliers want:
Funding that they can rely upon
Simplicity of access
Payments as early as possible
Where does SCF often fall down?
Traditional SCF programs can have challenges on all four of these requirements.
Reliable funding
The story at the start of this blog post is true. This was an SCF program set up with the best intentions to support and help suppliers.
There was only a single funder on the program providing a single facility. Although the funder had sub-participated some of the limit with others, the program was arranged under a single facility limit. The supplier could not access other SCF programs that the corporate buyer had, nor could the buyer easily support suppliers with its own funds when the limit was full.
This meant that suppliers were in a daily battle to access finance. Each morning, some of the facility would free up as invoices fell due and were paid by the corporate customer. That opened up some capacity in the facility - and then the suppliers who were fastest got their invoices financed, and those who were too slow had to wait for another day.
This is also a reason why suppliers can find dynamic discounting programs are not supportive. In a dynamic discounting program suppliers have to bid for funds. The highest bids get their invoices financed or paid - and the rest of the suppliers have to wait. This is not reliable funding.
This can be the difference between making payroll and missing payroll.
Suppliers want certainty - then they can plan. They can really benefit from a reliable source of early payments on the invoices that they present to customers - and if the funding source is not reliable, the value it provides is much diminished.
Simplicity of access
Supply chain finance programs are often operated by fintechs - who have good user interfaces. So it is easy for suppliers logging in to the platform to see what they can do, and access finance if it is available.
But simplicity is more than just about the platform - it is also about when the supplier can access finance as well as how.
There are many touchpoints between suppliers and their customers. An ICC survey indicated that most suppliers are interacting with up to 8 different departments at their corporate buyer - including treasury, finance, logistics, compliance, procurement, responsible purchasing, CSR, warehousing etc.
As a general principle, a supplier ships - and then has a process. A series of emails are sent with documents attached (eg: the invoice) and various buyer-side systems are updated. This moment is also when the supplier is ready to deal with early payments.
But most SCF programs are unable to process early payments until after delivery - which can be 10 days, 20 days or more after shipment. It is common for container-based shipments from Asia to Europe to take 4-6 weeks. This break is hard to manage - and requires supplier finance teams to keep revisiting a shipment that has long gone to see if early payments are possible,
The best SCF programs, for example like those run by PrimaTrade, enable suppliers to deal with their early payment requests and processes upfront at shipment - at the same time as everything else is happening. This increases utilisation and streamlines supplier activities.
Early payments
The point of supply chain finance is getting cash quickly to suppliers that need it - improving their resilience and helping them with their liquidity.
But early payments are usually not very early, especially for international suppliers. Most invoices are only approved for payment until after delivery which can be 10, 20, even 30 days after shipment.
When early payments are after delivery, suppliers usually still face:
The need for credit insurance
A collateral gap, because goods have left their balance sheet but cash has not arrived
Funding the time to early payment, which can still be 20 or 30 days - and invoices, especially cross-border, can be hard to finance, which means the supplier is using equity as its funding source.
Many treasurers and CFOs of corporate buyers who have arranged supply chain finance programs are disappointed with utilisation levels. The main reason is usually the inability of programs to deliver truly early payments.
A modern SCF platform like PrimaTrade enables the buyer to approve early payments at shipment - so that early payments are truly early, and (as above), the supplier process is synchronised with its other activities post-shipment.
SCF: Supplier-centric design
We recommend taking a supplier-centric approach to SCF program design. This includes:
Making sure that SME suppliers are included - they are the suppliers who need the liquidity most.
Ensuring the supplier process for early payments is synchronised with the other buyer-communications that happen at shipment.
Delivering early payments that are truly early - so that suppliers are getting paid at shipment and not after delivery, especially for international suppliers.
Providing certainty of funding by organising truly multi-funder facilities and enabling the buyer to substitute its own funds whenever it chooses, seamlessly within the program.
When SCF is built with suppliers in mind, corporate buyers also win.
Well-designed SCF programs deliver supply chains that are more resilient, reaching those suppliers that really need the liquidity and offering early payments that are truly early.
That also means suppliers are prepared to pay more for SCF programs that really benefit them - and that means utilisation and impact of the program are high.
What next?
PrimaTrade's platform is endorsed and recommended by a number of major European banking groups directly to their clients for international supply chains - especially in retail and manufacturing.
There is much more to this topic. If you would like to talk to us - or see if any of our partner banks would be happy to provide you with a limit - do get in touch here: