Stability Into The Supply Chain During Disruption
(Original article by P J Bain, in Prime Revenue)
Supply chain finance has gained considerable momentum over the last several years, especially given the recent economic landscape. Buyers and suppliers around the world rely on supply chain finance as a tool to improve working capital and navigate widespread volatility. For many companies, it has been a lifeline during a time of unimaginable disruption.
Whether it’s a small business using early payment as a catalyst for growth or an enterprise leveraging trade finance to inject stability into the supply chain during industry-wide disruption, there are endless examples of how supply chain finance can powerfully and positively impact businesses of all sizes around the world. We know firsthand the power of these programs to strengthen businesses because we watch our clients (and their suppliers) benefit from supply chain finance every day.
However, as with any financial tool, there have been rare occasions when supply chain finance has been mismanaged and misrepresented. Recent headlines have exposed how improper handling of funds can have a disastrous impact on an inherently positive solution – and it’s a shame that the few bad apples overshadow all of the good.
Supply Chain Finance Defined
Unfortunately, negative news is often followed by misinformed assumptions. There is a lot of noise around the ethics and risks associated with supply chain finance; however, many of the grievances are not even related to the actual concept of supply chain finance. Many of the popular stories of “supply chain finance gone wrong” are actually highly structured, opaque loan programs that don’t resemble the legitimate version of supply chain finance used by millions of companies globally as a tool to more efficiently run their businesses.
I want to provide a clear and accurate explanation of what supply chain finance is and how it works. In its proper and true form, supply chain finance allows buyers to optimize payment terms while simultaneously giving suppliers the option to get paid early at competitive and efficient rates. Funding is provided directly by a bank or other financial institution, and transactions are considered a true sale of receivables, meaning suppliers face no risk of recourse once the invoice has been advanced for early payment. When deployed ethically, supply chain finance will accelerate cash flow for both the buyer and the supplier while reducing the overall financing costs for both parties. This strengthens the sustainability of the supply chain because both businesses are financially stronger.
Supply chain finance should always be mutually beneficial and low risk for all parties involved, especially for the buyers and suppliers that rely on it as a material source of liquidity for their businesses. I want to make it clear: any arrangement that is not what I described above is likely not a true supply chain finance program.