Estimated reading time: 7 minutes

Supply Chain Finance (SCF) can, and should, be a force for good in ensuring much-needed liquidity reaches all suppliers, regardless of their size and meets the objectives of buyers. 

However, many suppliers, particularly SMEs, struggle to access necessary working capital, and buyers lack the motivation to set up or expand these programmes. 

Wayne Mills, founder and managing director at Atom Advisory, shares his top five tips for buyers and five questions for suppliers to ensure SCF fulfils its potential to accelerate growth and underpin robust supply chains.

Context/language

As with many industries, trade finance has a bewildering array of acronyms and naming conventions, so it is worth taking a moment to clearly set out what is meant by SCF.

SCF may also be known as “reverse factoring”, “supplier finance”, or “payables financing”, and SCF “facility” is often used interchangeably with SCF “programme”.

An additional variant known as “dynamic discounting” can also be an appropriate solution in certain circumstances (not discussed in detail below).

Regardless of the naming convention used, SCF shares the following common characteristics (simplified for ease of illustration):

  • A buyer (the “anchor corporate”) sets up and runs a SCF facility
  • Suppliers will be invited to the facility to provide access to early payment of approved outstanding invoices.
  • Funding is typically provided by a bank or other investor (but not always)
  • Facilities are typically delivered via a portal provided by a 3rd Party Technology Service Provider (or so-called “Fintech”)
  • A SCF facility should be mutually beneficial for both suppliers and buyers:
    • Suppliers are able to manage their working capital and access cheaper funding in line with the buyer’s cost of borrowing, particularly important to SME suppliers*
    • Buyers improve their supply chain resilience, financial targets and ESG performance.

*The supplier may choose to arrange their own invoice finance facility to access early payment of an invoice, but this may be more expensive (depending on the extent of the difference in rating/financial strength of buyer and supplier).

Five tips for buyers thinking about Supply Chain Finance

The importance of building and maintaining resilient supply chains has been well-understood for decades, but COVID-19 brought into sharp focus the need to reassess and reimagine supply chains, including supplier relationships.

The importance of building a resilient supply chain has been known for decades, but the impact of COVID-19 highlighted the need to reassess modern supply chain structures.

These five tips are a good starting place when setting up or expanding a SCF programme.

1. Define the programme objectives

Clearly defined objectives aligned to corporate strategy are critical to ensure appropriate outcomes are delivered. 

A SCF programme is only one part of a company-wide financing and risk strategy, so clarity on expected deliverables is necessary to align expectations and justify the time and effort required to implement or expand a programme.

Objectives could include the delivery of a target days payables outstanding (DPO) through extending payment terms, embedding supply chain resilience with key suppliers or delivering against ESG objectives. 

Buyers should also consider their position on accounting disclosures and how they interpret recently updated guidance from the standards-setting bodies.

2. Ensure business-wide stakeholder engagement

Whilst SCF discussions can often be treasury/finance-led, it is important to recognise the cross-functional nature of implementing and scaling a SCF programme. 

Early and continuing engagement across procurement, IT, risk, legal, treasury, and operations is essential.

A project team with representation from each area, including clear accountability, works well when engaging with funders and technology service providers. The same team can also oversee supplier engagement to ensure consistency of messaging and successful implementation.

3. Actively support supplier understanding and onboarding

Given the considerable time and effort needed by the buyer to set up a SCF programme, it is critical (and common sense) that success should be defined by the number and extent of suppliers using the facility. 

Whilst early engagement with key suppliers is likely to have taken place, resources will need to be directed to the programme roll-out, including launch, education, training and ongoing support. 

Many of these activities will be run, or supported by, the technology service provider and funder. The buyer should monitor progress against agreed KPI’s, always taking account of supplier feedback.

4. Review the changing external landscape

As already noted, setting up or expanding a SCF programme requires a significant time commitment for any buyer. Whilst a SCF programme should be seen as a medium to long-term commitment, ongoing assessments of the relative benefits are critical.

Macroeconomic volatility across global markets and ongoing geopolitical uncertainty means buyers should remind themselves of the initial objectives and deliverables for putting a programme in place to ensure they remain relevant. 

A regional overlay is often helpful to triangulate “local” issues against programme objectives and supplier needs.    

5. Align physical and financial supply chains

As companies strive to embed supply chain resilience across global operations, a SCF programme can support the alignment of physical and financial supply chains.

Whilst on-shoring or near-shoring may deliver pockets of resilience, the reality for many buyers is that supply chains across continents are unavoidable. It is critical that a programme roll-out is directed to smaller and medium-sized suppliers, not just the “top 10” in each region.

Whilst the cost of onboarding “small” suppliers may not appear economically robust, looking beyond the financial into the physical supply chain will ensure strong alignment.

Five questions for suppliers to ask themselves 

Whilst certainly not true in all cases, there is often an imbalance between the size and financial strength of buyers and suppliers. Careful consideration and individual assessment of SCF can deliver significant benefits to suppliers, but these five questions can help ensure positive outcomes. 

1. Which buyers run a SCF programme?

An often-overlooked activity of suppliers is to ask if customers (buyers) have (or are planning to implement) a SCF programme. This is an important and simple, yet often ignored dialogue to have.

Understanding which buyers offer a SCF programme and the terms behind the programme can help plan working capital strategies and deepen customer relationships.

2. Is SCF the right solution for me?

In the same way a buyer should be clear about their objectives for SCF, suppliers need to critically consider whether SCF is the best option. 

Consideration should be given to both financial and non-financial factors, including commercial relationships, the profit margin on goods/services supplied, and the relative cost of accessing finance. 

Suppliers should also note they have no control over whether the buyer chooses to continue with or expand a SCF programme.

3. Is my working capital optimised by using SCF?

Focusing on managing and optimising working capital is a daily activity for most suppliers. The extent to which SCF could offer the best solution for a supplier will depend on:

  1. Ease of access to working capital – many SME suppliers find it difficult to access funding, an issue that may worsen in the coming months.
  1. Cost of working capital – in many cases, suppliers can access funding via SCF at a lower cost than they would otherwise be able to. 

Suppliers should therefore consider the relative merits of a SCF programme. 

4. What is the best use of my time?

Technological advancements have significantly reduced timelines and improved processes. SCF providers now routinely onboard thousands of suppliers in a very efficient way, delivering an excellent client experience.

A supplier should therefore consider how many SCF programmes will they need to onboard to deliver their own working capital needs when compared to setting up their own working capital facility (for example, an invoice finance facility).

Whilst individual circumstances vary, for many suppliers, a mix of their own working capital facility alongside SCF can offer the best solution.    

5. Which solution offers the most flexibility?

SCF has evolved significantly over the past five years. Beyond simply providing early access to finance (which both SCF and invoice finance provide), developments in platform and software integrations mean SCF can now be used to help suppliers with cash flow forecasting. 

This is particularly valuable as “resource-constrained” and “time-starved” becomes the norm for many.