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Supply chain finance is a relatively new model of accommodating the needs of both suppliers and buyers, yet the vast majority of businesses are choosing to forego this great opportunity. That means you can use this system to remain competitive in the market and get an edge as a trailblazer
if you’re a buyer and gain easier access to funding and greater flexibility as a supplier. In recent times, this has become increasingly important for small to medium businesses as they are at the greatest risk of bankruptcy.
What is supply chain finance?
One of the most innovative trade finance systems of the day is supply chain finance (SCF), which is the practice of supply chain facilitation through a middleman. The idea is that the buyer orders products from the supplier, who will, in turn, provide an invoice. The invoice is then paid by the financial middleman who is then paid by the business which ordered the stock in the first place.
This way, the buyers' payment terms are extended, while the suppliers are paid early. Also, in this case, it is the buyer who is financing the order, as opposed to the supplier. This way, it is a definite win for all parties involved as this system provides numerous benefits for both buyers and suppliers.
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Benefits for the buyers
A normal stock order offers next to no flexibility, requiring the invoice to be paid within a month or less, while an SCF contract grants extended payment terms to buyers. This offers a substantial increase in financial flexibility and lets the business adapt more quickly to the demands of the situation, all while reducing the financial pressure created by having to pay the invoices within a fixed deadline.
Another benefit for buyers is that SCF mitigates supply chain risks, as it provides suppliers with affordable financing, therefore reducing the risk of supply chain distribution. Since this is also a benefit for suppliers, buyers can leverage the SCF option in negotiations and secure a better commercial deal.
Benefits for suppliers
Some of the most attractive benefits for suppliers using SCF are the reduction of their days' sales outstanding (DSO) and access to low-cost funding. DSO reduction is achieved through early financing, therefore improving the working capital position of the supplier. This also means improved cash flow, as well as more accurate cash flow prediction, allowing suppliers to make better informed financial decisions, invest in the development of their business, expand, and ultimately offer better services.
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It takes two to tango
There are some benefits that can only be achieved through successful buyer-supplier cooperation. Since most SCF systems operate on a cloud that both the supplier and the buyer have access to, it provides greater transparency for both parties, increased operational efficiency and full visibility of the payment process.
As a consequence, the relationship between the buyer and the supplier is strengthened as they are both invested, through the SCF, in their mutual success. This emphasizes cooperation and also penalizes anything but good faith and teamwork. If a supplier can’t stay afloat, the buyer will lose important stock from that supplier, and problems for the buyer could also mean problems for the supplier.
This creates a near-symbiotic relationship between the buyer and the supplier whose main goal after the implementation of the SCF is their mutual success.
Potential problems with SCF
The problems related to SCF arise not because they are inherent to the SCF itself, but because they are inherent to human nature as well as the nature of the business. However important the benefits of having a financial plan are, business owners have decided to err on the side of caution.
In recent times, which have been uncertain, to say the least, due to the pandemic and other global events, businesses are trying to avoid taking risks and implement as few impactful changes as possible in order to protect themselves.
Buyers are also hesitant to offer the SCF programs to large segments of their suppliers, which can sometimes block participation. On the other hand, the implementation of SCF requires the coordination of various business sectors which can be problematic with the current remote working model.
Even with the challenges that come with SCF, implementing it still brings incomparably more benefits than setbacks for all parties involved. While some are still questioning this statement, others are deciding to seize the day and capitalize not only on the benefits of SCF but also on the fact that it is being widely underused. The question is, which path will you choose for your business?