Supply chain financing

The evolution of supply chain finance

Milan Panchmatia Blog, Supply Chain

Back in October 2012, the Prime Minister unveiled a new scheme aimed at helping smaller businesses secure affordable finance. The initiative received a wide range of support and leading companies, including Diageo, Kingfisher, Tesco and IBM all signed up.

The popularity of the scheme and the fact it was driven by both public and private sector organisations, indicates the potential benefits behind supply chain finance. The system offers leading businesses an innovative means to help suppliers within their supply chain access financing at a lower cost.

Mutual benefits

In practice, banks will be informed when an invoice is approved for payment by a large business and can in turn lend to the relevant supplier at a much lower cost. The idea is that both sides will be able to draw profit from this and has already been implemented successfully by companies such as Rolls Royce and Vodafone. The government has also set up its own scheme, aimed at supporting the pharmaceutical industry.

Supply chain finance represents an option well worth considering for procurement departments looking to support their suppliers. A combination of better collaboration, investment, improved payment terms and, in some cases, more transparency, can lead to a much stronger and more effective relationship.

In addition, supply chain finance does not compromise a supplier’s ability to finance itself from other sources, nor does it impact its credit rating. For the buyer, schemes can result in a more resilient supply chains and consequently improve the quality and delivery of products, whilst reducing risk.

Not just SMEs

Rolls Royce, one of the early adopters, has revealed that not only smaller suppliers have turned to supply chain finance. The company found that suppliers with a similar or higher credit ratings have been attracted to the flexibility associated with the solution.

In these instances, companies are looking for more control over their balance sheets and are able to leverage off-balance sheet financing to optimise their working capital at no added cost. Of course, this model is dependent on the nature of select supply chains and is not a blanket solution to suppliers suffering from increasingly tight margins.

New technologies emerging

In an interview given to Forbes, John Bruggeman, CEO of German startup Traxpay, explains how his company has positioned itself to provide supply chain finance on a global level. Traxpay is essentially a PayPal-type platform created for the business world, which allows businesses within a supply chain to make safe payments to each other.

Traxpay recently announced it was teaming up with MasterCard, as part of a four year deal to provide the new platform with a global payment network. The agreement will provide the startup, which has already raised more than $15 million of investment, with the scale needed to expand.

Bruggeman describes Traxpay as inhabiting the ‘sweet spot’, which allows the company to provide financing to suppliers of all sizes. ‘So buyers can treat all their suppliers innovatively, not just the high end guys,’ he explained.

A number of electronic invoicing companies, such as Ariba and Baseware, have combined electronic invoice processing and payments. Ariba is working with the Discover Network, whereas Basware has formed a partnership with MasterCard.

Strategic incentives

The potential benefits of the Traxpay system are numerous, including allowing business to preserve or make available the financial support many suppliers can take advantage of. A supplier can, for example, be provided with investment to help it leverage a large scale purchase, leading to mutual benefits in terms of cost.

According to Bruggeman, the service will enable CFOs to take control of an area previously managed by banks. Using this type of solution means businesses have control over all aspects of supplier payment. ‘Payments are no longer just tactical but they become a strategic weapon for the CFO who can say how do we want to compensate our supply chain,’ he said.

These types of development and innovation in the supply chain are important for businesses’ of all sizes to consider. Utilising non-standard methodologies can provide companies with an additional edge over their competitors, whilst strengthening both their cost control and transparency as well as helping to identify and ultimately eliminate risk.