buyer’s credit rating, which typically is stronger than the supplier’s, helping to rein in the cost of this financing tool. For example, a smaller business looking to borrow from a bank or finance provider might be charged between 6 and 10% interest or more annually, Monaghan says. Financing through an SCF program runs a fraction of that, while offering faster access to funds. The financial institution pays the supplier, usually before it collects from the customer, and less the discount. Often, payments are made days after invoice approval. The financial firm then collects from the customer on the originally scheduled terms, such as 90 days. BENEFITS ABOUND Supply chain finance funding is cost- effective, short-term, and uncommitted, Sullivan says. And by helping suppliers manage excessive exposure to a single or small concentration of buyers, SCF also helps mitigate risk. SCF also offers transparency, says Donna McNamara, director with Citi. Suppliers gain visibility to the invoice approval process and payment time frame, and they can monitor invoices as they move through these functions. Buyers benefit as well, Dunn notes. They can use SCF to strengthen relationships with suppliers. And by helping buyers gain quicker access
on behalf of its retail client from that company’s suppliers. The logistics firm might sponsor an SCF program the retailer can offer its suppliers.
to financing, they strengthen their supply chains. In the past few years, SCF has also helped fund some buyers’
environmental, social and governance initiatives, Obermueller says. Buyers can use supply chain financing to support diverse suppliers, offering faster payment at attractive rates. In addition, the improved payment terms and liquidity SCF makes can allow some suppliers to invest in, for instance, more efficient equipment. WHO USES SCF? Historically, SCF programs tended to be concentrated in consumer goods and industrial companies, both of which purchase in large volumes from a range of suppliers. That has changed as SCF has gained adoption across many industries. SCF programs have also been more prevalent in sectors with lower margins, where companies might struggle if they must wait to be paid, yet for whom the cost of traditional financing can eat into margins, Monaghan says.
HOW TO LAUNCH AN SCF PROGRAM
While each SCF program is different, a common starting point for the funding firm is to identify the suppliers for which the program likely will be a solid fit, Feather says. Typically, not all suppliers are. Historically, suppliers with lower annual spend would be better suited for a purchasing or virtual card. However, this is changing as the supply chain finance landscape and technology evolves, with some SCF providers offering solutions geared to these suppliers, Feather says. Among the suppliers invited into a well- structured SCF program, between 70 and 80% usually join. Suppliers joining SCF programs need to be able to handle the documentation
requirements, Feather says. While not difficult, they have to provide information, like their articles of
incorporation, that allow the financing firm to comply with know-your-customer and other regulations. The buyer handles the technical implementation of the SCF platform, Dunn says. Suppliers access the program online. Once suppliers join an SCF program, they generally often can receive payment as soon as an invoice is approved, although they also can decide to wait. “The supplier gets control of its cash flow,” Feather says. Many buyers launch one segment of their supply chain, address any challenges, and then add other business units, Dunn says. Successfully starting an SCF program generally requires the involvement of multiple departments within the buyer’s organization, including finance, treasury, and information technology. The procurement department is also critical to success. “If they’re not on board driving the solution, it’s typically not successful,” Dunn says.
Large logistics companies, like companies in other sectors, often establish SCF programs for their
suppliers, Dunn says. In addition, some develop SCF arrangements that their clients can offer their own suppliers. One example: Each month a logistics firm ships $1 million worth of pet food
ROADBLOCK TO BLOCKCHAIN
To date, blockchain hasn’t played a big role in supply chain finance. “The lack of regulation and scalability, as well as security concerns, has a negative impact on the adoption rate of blockchain technology in SCF,” says Joerg Obermueller, senior vice president for supply chain finance with CIT. These challenges need to be addressed to ensure blockchain can play a meaningful role going forward. Blockchain could play a potential role in smart contracts, which would lower costs and boost efficiency, says Nathan Feather, chief financial officer with PrimeRevenue, a provider of working capital solutions. He also expects blockchain to be used to delineate ownership of assets, making the onboarding of suppliers more efficient. “We’re a long way from that, however,” he adds.
44 Inbound Logistics • February 2022
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