Supply chain finance comes of age
Corporate treasurers are increasingly focused on managing working capital better when buying and selling – and many now realise that supply chain finance (SCF) can help. By breaking down the silos between the purchasing, selling and treasury functions of a business, SCF can ensure good risk management, boost liquidity and improve the balance sheet.
|Anand Pande, global head of trade product management at RBS|
As companies start to understand what SCF can offer, the smart ones are adapting to those capabilities or integrating new techniques into their existing processes. Treasurers’ roles have grown beyond the traditional realm of liquidity. Improving working capital and managing risk is now more important than ever following the economic crisis and resulting decline in customer demand.
Low interest rates mean many businesses have an abundance of liquid cash but no good investment options, while credit is tight for their suppliers.
But even though this has led to interest in SCF services growing significantly in recent years, it remains a maturing business. Less than 10 per cent of companies’ demands are currently met by SCF services, according to a global study by Demica Research, showing huge potential for growth.
The raft of new tools businesses can adopt includes dynamic discounting, which enables cash rich companies to create ‘self funded’ supplier financing programs and generate large returns on their cash reserves.
Buyers offer early payments to suppliers in exchange for cash discounts, the rate of which is calculated dynamically – the earlier the payment requested by the supplier, the greater the discount.
This is a cash optimisation opportunity for the buyer as, in today’s low interest rate environment, it usually offers the best return on cash reserves.
Another growing trend is the integration of e-invoicing services into the SCF proposition. Electronic invoicing is not just the electronic transmission of a paper invoice as an email attachment or fax. It involves the generation, transmission, receipt and archiving of invoices in a secure environment so they can be processed by and exchanged between existing systems regardless of format.
Good e-invoicing can reduce costs for buyer and seller by eliminating manual processes. If successfully combined with supply chain finance, it could lead to end-to-end financing solutions on both sides of a company’s activity – purchasing and selling.
The Bank Payment Obligation (BPO) can also bring benefits. It’s a new trade settlement instrument – an irrevocable pledge by one bank to another that payment will be made on a specified date, after the data has been successfully matched electronically.
From a seller’s perspective this provides faster collection leading to accelerated cash flow, but may also provide collateral for accessing pre-shipment and postshipment finance and extended credit terms. From a buyer’s perspective, payments can be made immediately, allowing for discounts and rebates.
This latest entrant to open account business will need time to prove itself as the takeup rate will depend on how much value corporates see BPOs adding to their value chains.
With SCF business predicted to grow between 10 and 25 per cent a year, the demand for greater standardisation is rising and various initiatives are underway. Establishing standards creates the foundation for future growth.
Banks for their part are making progress meeting their clients’ needs and leading the drive for greater automation and standardisation to boost efficiency further.
This makes now the right time for companies to embrace SCF services. Those that do can look forward to a future where supply chains are smoother, cheaper and more beneficial for everyone involved.
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