Author: Karan Lal, The Hackett Group
Master the essentials to maximize the benefits
With well-established technology to support it, use of supply chain finance (SCF) continues to grow. Yet, a successful SCF arrangement depends on much more than technology. This article highlights five factors – from efficient onboarding processes to sustaining a healthy SCF arrangement – essential for success.
SCF, also known as “reverse factoring,” began gaining traction in the early 2000s. It continued to expand later in the decade as banks sought to diversify their service offerings. This was in part also influenced through government pressure to make cash available along the supply chain. This uptick in the use of SCF arrangements, in turn, motivated technology firms to enter the market, providing tools for aggregating, packaging and using various information generated during supply chain activities to manage risk. Now, with well-established technology capabilities to support it, SCF is increasingly a common component of cash optimization.
How supply chain finance works
Many large corporations with complex and globally dispersed supply chain structures are looking for ways to better manage their cash outlay cycle. SCF is an arrangement used to optimize working capital while maintaining a healthy supply chain.
The concept works like this: A supplier submits an invoice to the buyer following normal protocol. The buyer approves the invoice and uploads it into the SCF platform, where the supplier selects whether to designate the invoice for early payment. If early payment is chosen, the invoice is then sold to the assigned funder(s), typically a bank or other financial institution, at a discount. The funder receives and processes the request and provides early payment to the supplier. The amount of the invoice, less a financing fee or discount, is transferred electronically to the supplier’s bank account. Once the invoice has matured to its original payment date, the buyer pays the funder (or the supplier, if the invoice was not sold).
In this scenario, invoice liability falls to the buyer rather than the supplier. The bank assesses the buyer’s (not the supplier’s) creditworthiness and interest rate. This decreases the bank’s risk in cases where the supplier’s creditworthiness may not be as strong as the buyer’s creditworthiness.
Five essential factors for establishing successful SCF arrangements
The SCF technology platform provides an integrated tool for handling the end-to-end process for all parties, including buyer, supplier and funder. While this technology platform is essential to a successful SCF arrangement, there are other factors that are equally important. Insufficient attention to these areas can lead to a shaky start and also limit the potential to realize and sustain the benefits of this strategy.
- Clear understanding of your supply chain complexity and global reach. Using transactional-level data analysis tools can identify working capital optimization opportunities, such as rationalizing supplier contracts and opening prospects for global supplier agreements. Such analysis can also help define key requirements for SCF transactions. For example, the volume of cross-border transactions tends to become an important talking point during the selection process because some providers have better global reach and capacity for foreign currency transactions.
- The full new research from The Hackett Group is available by request via email, or with registration at this link http://go.poweredbyhackett.
About the author
Senior Consultant Karan Lal is an experienced working capital consultant at The Hackett Group. Based in the London office, he specializes in delivering assessments and implementation solutions for large-scale and complex opportunities throughout the customer-to-cash process. Karan is also a partially qualified ACCA accountant, adding his expertise in balance sheet and profit and loss analysis to working capital management projects. He is fluent in English, German and Punjabi.