Supply Chain Finance

Pay your invoices later but keep your suppliers happy!

Impossible? No - supply chain finance is a unique financing product which allows you to do just that. If your business needs to conserve working capital (to finance growth or carry you through a difficult trading period) you should consider introducing finance into your supply chain. This means you can keep your cash for longer but your suppliers will still be paid on time - perhaps even earlier than usual.

Buyers and suppliers in any supply chain often arm-wrestle about payment and credit terms. The buyer wants to pay as late as possible, and the supplier wants to be paid as early as possible. Both try to keep as much cash as possible for as long as possible in its own business.

The stronger business normally wins, leaving the smaller one exposed to cash flow problems. This creates weak links in the supply chain, which ironically may come back to haunt the stronger business one day when it has to go out and look for a new buyer or supplier after its old "partner" has gone belly-up.

Supply chain finance (sometimes called "reverse factoring") resolves this problem by injecting cash flow into the supply chain at critical points between buyers and suppliers, giving both of them some breathing space.

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Supply chain finance is used to resolve cash flow problems in a typical supply chain.

These problems are usually caused by the fact that not all suppliers and buyers in a supply chain are equal.

Some are much larger than others and they can (and do) demand generous credit terms.

Others are so small that they have no bargaining power whatsoever – they are just too happy to be part of the supply chain.

For example, take a small supplier of biltong to a large retail chain.

The biltong supplier has to pay cash for all its meat supplies. It then produces the biltong and supplies the retailer. The retailer demands 30 day credit terms, but the retailer is paid immediately when the biltong is sold to its customers.

In this supply chain, one can say that the retailer has the cash which the biltong supplier needs to pay its meat suppliers.

In theory, the retailer could simply pay the biltong supplier on delivery. Practically this would mean a major deviation from the retailer’s business model. The retailer would simply not do it.

The supplier’s cash flow problem becomes much larger when the retailer increases its orders for more biltong if the sales are good. The biltong supplier has to find even more cash to pay its meat suppliers, while the amount owed by the retailer increases proportionately.

The anomaly which arises is that if the biltong tastes great, the retailer’s customers buy more biltong, the retailer therefore orders more biltong, the biltong supplier has to order more meat for which it has to pay cash to its own meat suppliers – but while the retailer’s cash position improves, the biltong supplier’s cash flow suffers because its business grows!

To resolve this problem, the retailer could assist its small suppliers, like the biltong producer, by arranging with a financier to inject supply chain finance into the system.

There are many ways to do this, but typically the retailer would confirm to the financier once its supplier invoices are approved for payment. The financier would then offer finance against the discounting of those invoices to the suppliers.

Supply chain finance is still small in South Africa, but it is a growing trend worldwide.

Currently there are only a few financiers offering supply chain finance in South Africa. In view of BEE procurement principles and regulations one would have expected a much faster trend in the direction of supply chain finance already.

Hopefully more and more large corporates will become aware of supply chain finance and the benefits it can provide to its small suppliers, which will ultimately also benefit the corporates themselves.

Reverse factoring is simply another term for supply chain finance. It is usually initiated by the buyer of the products or services, rather than the supplier.

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