Supply chain finance can help businesses save cost and facilitate smooth operations.
Keeping costs down is important for any business looking to maximize profits and staying competitive. With supply chains becoming increasingly globalised, businesses have increasingly been implementing supply chain finance (SCF) to manage their working capital costs and maintain their competitive edge.
What is Supply Chain Finance?
Supply Chain Finance (SCF) is a financial service provided by a third-party financial institutions (e.g. banks) that make use of technology solutions to manage business and financing processes that seamlessly link parties involved in a business transaction: the buyer, seller and financing institution.
In short, supply chain financing allows for discounting on accounts receivables and accounts payable, allowing:
i) Buyers to negotiate extension of payment terms for better cash conversion cycle (i.e. frees up cash to use somewhere else), improve payables processing and improve the overall viability of the supply chain.
ii) Sellers access to cheaper capital and the choice to sell its receivables if they want to receive immediate payment. This reduces their payment risks, increases sales due to credit and improve the overall viability of the supply chain.
This encourages close cooperation between buyers and sellers.
What are the benefits of supply chain finance for businesses including SMEs?
Industries that stand to benefit substantially from the use of supply chain finance include the e-commerce, FMCG, apparel and bio pharma industries in the Iskandar Malaysia economic zone in Johor Bahru which are highly reliant on a global supply chain.
Supply chain finance helps businesses improve the efficiency and minimizing risks and additional costs throughout the entire supply chain. For sellers/vendors, supply chain finance can minimize the time that inventories remain stuck in warehouses and avoid the charges incurred by it, as well as avoid transportation, duties and other costs.
And although a good credit rating helps, SCF makes such financial assistance available to SMEs which otherwise do not have a business operating history to allow it to take advantage of factoring/reverse factoring.
According to the American Council of Supply Chain Management Professionals (CSCMP), 14.1% of all US logistics costs were incurred by holding inventory – and SCF is an effective way of minimizing idle goods warehousing to a minimum, and saving costs.
Supply chain finance also helps to guard against sudden loss of global liquidity, a situation that could spill over suddenly from a financial crisis and affect the flow of capital required to operate.
The Asian financial crisis in 1997 is such a case where a sudden loss of availability of capital overseas disrupted US buyers’ supply chains – and therefore negatively impact its operations and therefore profitability.