Supply chain security has rocketed up the corporate agenda following the challenges created by Covid-19 and other recent world events. One of the key ways to improve it is through supply chain finance. We look at what you need to consider if you’re going down this route and how you can make the documentation process run smoothly and efficiently.
How to achieve stress-free supply chain financing
Paying suppliers promptly is not a panacea for all supply chain issues but it is an effective way to support suppliers and so improve your supply chain security. Supply chain finance is specifically designed to achieve this. It can take several forms but, typically, the way it works is that the supplier enjoys accelerated payment of their invoice by the lender – albeit at a discounted rate. On the usual (deferred) invoice payment date, the buyer pays the lender the full amount of the invoice. In this way, the supplier's cashflows are enhanced, the buyer's cashflows are not put under pressure, and the lender makes a return. In short, everyone is happy.
Be clear about your objectives
If you are considering using supply chain finance to improve security, it’s important to be clear about your objectives from the outset. Ask yourself whether you want to:
- have a paying agent to manage payments to a group of suppliers
- offer suppliers the option to accelerate payment of their invoice and/or
- extend your own cashflow by deferring payment of the invoice (in return for paying interest to the lender).
Additionally, will your suppliers want all their invoices to be within the scope of the financing or will they prefer to choose whether to accelerate payment of specific invoices?
Review the risks in your trading cycle
You will also want to consider the nature of your particular trading cycle and its inherent risks. Hopefully, as a prudent buyer you will have thought about the fundability of your invoices when negotiating agreements with your suppliers. Your lender will want to review these agreements and any related documents to understand the payment terms including the impact of any rebates, set offs or volume discounts.
Consider the impact of different jurisdictions
Another issue to bear in mind is where your suppliers are based and the laws governing your supply agreements. While English law provides a useful framework for supply chain finance, the laws of other jurisdictions can be less flexible. This may restrict the range of invoices that will be suitable for financing.
Be aware of your lender’s needs
It’s important to consider the needs of your lender as well as your suppliers. For example, your lender will want assurance that the invoices are not subject to the rights of third parties (for example an invoice discounter providing facilities to the supplier). They may also require credit enhancement, for instance in the form of credit assurance, cash security or a bank guarantee.
Resolve any tech platform issues
Finally, if your volume of invoices is so large that you’ll be using a tech platform to facilitate the financing, make sure that you resolve any data issues and that the platform is compatible with your own systems.
Addressing all these points at an early stage with the support of advisers experienced in supply chain finance will ensure an efficient and low-stress documentation process – and lead to positive outcomes for all involved.
If you’d like to discuss using supply chain finance in your business, please contact Mike Davison or Batsho Nthoi.
Look out for the next article in our ‘Financing your business: more flow, less friction’ series. This will consider whether asset based lending might be more resilient and useful than other traditional funding models.
Managing Associate, Finance