Supply Chain Finance – An Overview for Non-Experts

Hot Topic

Our hot topic this month has been eInvoicing and Supply Chain Finance – to be honest, we thought we might have more guest articles, but never mind, let’s finish with an overview of the supply chain finance part of that topic – a very brief overview, we should say, as whole books have been written about this!

To many procurement practitioners, Supply Chain Finance (SCF) is a bit of a mystery. It seems very complicated, which in itself then becomes a good reason to ignore it. It is also surprisingly difficult to get a good, clear, agreed definition – in researching for this short article, we came across a definition on the website no less that seems incorrect - “Supply chain finance allows a supplier to sell its invoices to a bank at a discount as soon as they are approved by the buyer” it says, which is only one form of SCF surely?

Wikipedia seems more on the mark. “Global supply-chain finance refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain”.

So that set of solutions could include financing of stock even before the supplier has sold it; but the aspect that most often interests procurement is when suppliers receive finance based on having issued an invoice to the buyer. That finance is available earlier than it would have been if the supplier simply waited for the buying organisation to pay on its usual terms.

Going back a few years, factoring was probably the most usual form of SCF. This involves the supplier actually selling their invoice to a third party, at a discounted value. That third party then owns the receivables and is responsible for collecting the debt from the buyer. Not all procurement folk are very keen on this, and some contracts even forbid the use of factoring.

But in recent years, approaches where the invoices are not sold but are used as collateral for what is in effect a loan, paid to the supplier earlier than they would have been paid by the buyer, have become more prevalent. Just to confuse everyone, this can be called simply supply chain finance, or also supplier finance, reverse factoring, or various other terms. (Even the use of Procurement Cards can fall into this definition; the supplier gets their money early in return for a fee, before the buyer has to pay).

The beauty of this approach, done well, is that everyone can benefit. Suppliers who value early payment and need the cash can receive that payment, usually at an effective rate of interest that is lower than bank borrowing or other finance. Suppliers who have better cash positions do not need to accept the offer of funding of course. And buyers can take a proportion of the fees paid by suppliers in return for early payment, assuming the buyer assumes some sort of management role in the scheme.

How does all this link with eInvoicing? Well, such schemes generally depend on approved invoices being used, as this gives the lender more security of course that they will be repaid. But knowing exactly which invoices have been approved is much easier if the organisation uses an e-invoicing platform of some sort. some SCF programmes rely on approved invoice data being loaded into a separate system; but it is obviously earlier if the organisation’s core P2P or e-invoicing platform can directly provide the data to drive an SCF programme – or if that system can link automatically to the SCF platform.

So the growth in e-invoicing is driving more use of SCF, and to some extent, vice versa too. Organisations can see the benefits of SCF and are suing that to drive the business case for e-invoicing. This has also led to a major growth in the market, with established and deep e-invoicing leaders such as Basware and Tungsten (OB10 as was) moving into offering various SCF products, and newer firms like Tradeshift and Taulia and Prime Revenue becoming serious players in this sector. Firms coming from a broad P2P background including SAP, Oracle and Coupa are also likely to become more interested in SCF offerings, we suspect.

Anyway, that is a bit of an SCF primer for anyone who is not a deep expert already. It’s certainly something that CPOs and other leaders should be looking at, if you haven’t already – and for a useful reminder of the options for SCF (the next step on from this article perhaps), take a look at our piece here which featured some very useful thoughts from Ad van der Poel of Basware in terms of how you can classify the different options for SCF.

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