Supply chain finance (SCF) is a term that is everyone is currently talking about. What does the term include and why is it worth involving oneself with it? The term SCF is the subject of numerous definitions and explanations. The one thing they all have in common is that, in the broadest possible sense, they all concern the optimisation of financing structures and financial flows of individual or multiple companies along a supply chain.
First of all: why is supply chain finance currently such a hot topic? On the one hand, an increasing number of commercial banks are passing on the negative deposit interest rate of the European central bank (ECB) to their customers. This “fee for having a credit balance” for large corporate customers with a high level of cash represents an incentive for treasurers to redeploy large deposits even in the short term or to convert them into active items, such as direct investments or supply chain financing, for example. As a result of the alternative use of free liquidity for the purpose of pre-financing suppliers, the fee for having a credit balance is saved and, in addition, other possible early payment discounts granted by suppliers can be achieved.
On the other hand, suppliers and external service providers of larger companies in particular are looking at their ongoing optimisation efforts in the field of working capital. In this connection, the market conditions and balance of power between the purchaser and the supplier are often exploited unilaterally in order to extend own payment terms as far as the law allows and thus pass on the financing costs to suppliers.
Harmonising these different requirements of suppliers and customers is the central objective of SCF. Through the various SCF concepts, committed liquidity in the supply chain can be released and, at the same time, financing costs can be reduced – which can benefit both sides.
How does SCF work?
A range of concepts is available to implement SCF: dynamic discounting can be seen as a comparatively simple form, whereby the supplier grants a cash discount for early payment of its invoices – the amount of the reduction and the time of payment are quickly and freely negotiable. Reverse factoring represents another opportunity to improve capital flows, whereby a bank assumes the interim financing of the supplier receivable on the purchaser’s terms. Further variants of supply chain financing involve the purchaser granting a loan to the supplier, the use of credit cards (known as purchasing cards) or also the sale of the receivable by the supplier. None of this is particularly new, however.
What is new is that technical solutions are now available to implement these concepts, and they can be used along the value creation chain between the ERP systems of the customer, the supplier and the banks. In addition, there is the possibility to increasingly dispense with the involvement of banks as an intermediary for the (interim) financing of supplier receivables. Siemens, for example, via its ORBIAN financing platform offers suppliers the option of selling their receivables independently of the banks for up to 100% of their value and to receive their money after two working days. The supplier’s costs for the earlier payment of its receivable are to be deducted from this, which takes the form of a discount, i.e., a discount on the nominal value of the receivable that the supplier records as an expense when selling the receivable.
Such processes require corresponding IT support and a number of companies such as Traxpay, Basware and CRX, which see themselves as payment transaction platforms, are entering the market. What these solutions have in common is that they can be used for the dynamic implementation of the various methods for supply chain financing. In other words, they operate between the purchaser’s ERP system and the supplier’s ERP system in a B2B network. These solutions are often supported in the background by commercial banks, e.g. Commerzbank, or established providers such as 360T.
Through the number of possible concepts, SCF provides a comprehensive contribution for improving capital flows. Removing the uncertainty and reservations that exist with regard to SCF measures is the responsibility of the treasury department, which is originally responsible for the settlement of payments and the optimisation of liquidity. The workings and effectiveness of individual measures and the contribution they make to reducing capital costs and increasing liquidity are to be made transparent by the treasury department and conveyed to the departments involved in the process (e.g. procurement or suppliers). The objective must be to select the right concept for the respective supplier relationship. In this regard, it is important that we can react with flexibility in the methods, processes and IT solutions.
Author: Dr. Andreas Liedtke, Senior Manager, firstname.lastname@example.org
Source: KPMG Corporate Treasury News, Edition 41, March 2015
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