Due to the ever-changing nature of the global economic environment and global trade tensions, supply chains around the world are faced with the threat of major disruption. Continuity and certainty of business are of increasing concern. The supply chain finance (SCF) solution steps in to address this issue by ensuring suppliers around the world, no matter the size or scale of their business are able to access financing at an affordable rate.
Many suppliers operate their business on a smaller scale and have lower credit ratings than their larger buyer counterparts; as a consequence they face the challenge of being charged a higher fee for financing against their own, relatively weaker, balance sheet. This issue is becoming more prominent as financial institutions shift their focus towards financing higher rated companies; it is proving to be challenging for small suppliers to find financing at all, let alone at an affordable rate.
The SCF solution allows suppliers to leverage their buyer’s superior credit rating and obtain financing at a more affordable rate, creating efficiencies in their business. The seller also has an advantage of receiving their payments earlier, or as expected, according to their payment terms.
Sustainability in the supply chain is rapidly becoming a major focus area in the market. End users (consumers and retailers) of products and services are becoming increasingly curious about the facts concerning the process of how their products are produced and the materials used to produce them. These users are taking firm action in their support of practices to promote sustainability. As a result, companies are at increasing risk of their products and business being rejected by the marketplace due to unsustainable practices. The SCF solution addresses this concern and incorporates tailored solutions to reward suppliers who are promoting sustainability in their business. This can be used as a mechanism to promote, enhance and monitor the practices involved throughout the supply chain.
Second and deep tier financing is another prominent aspect that the SCF solution is targeting. The focus here is not only on financing the direct suppliers – the so called first tier, but also providing access to financing down to multiple levels within a company’s supply chain. This involves taking into account financing for every supplier in the supply chain no matter the size, not just the first tier but those suppliers who supply to the first tier, second tier and so on.
Accounting practices around supply change financing has become another talked about issue in the marketplace with the big four accounting firms writing to the Financial Accounting Standards Board (FASB) around their concerns about the accounting treatment of supply chain finance programmes.
This has resulted in a heightened awareness around the declaration of SCF programmes in the financial statements of companies. There is also a concern around the readiness and ability of a company to manage its liquidity positions should their SCF programme be discontinued. Companies need to have enough liquidity available to ensure the smooth running of the business.
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