What Is Supply Chain Financing?

Supply Chain Managers understandably focus on the physical movement of goods and, increasingly, on the supporting flows of information. Typically, how money moves through the chain is somebody else’s problem. However, this approach is flawed because cash flow issues are the most avoidable cause of supply chain vulnerability and failure.

Why? Well, supply contracts normally specify payment 30, or 60, or 90 days after successful delivery to the customer. But customers, large corporations and governmental departments, can be notoriously cavalier in honouring these terms.

Now consider that extended, global supply chains can add another month or two in shipping time. So, suppliers often need to wait more than 6 months for their payment.  But still need to pay for their own labour and suppliers in the meantime.

The supply chain funding problem
  • Very few firms are sitting on un-allocated cash piles to cover this gap.
  • Borrowing to fund the supply chain can be cripplingly expensive.
  • Funds that should be allocated to productive investment, is tied up.
  • Sooner or later the cash flow problems will bring down a key supplier and the entire supply chain is in jeopardy.
  • Funding problems are a significant barrier to new suppliers entering a market.

To survive, suppliers must typically resort to factoring or invoice discounting. Here, a finance house takes control of the supplier’s invoices in return for a proportion of the value up front. The financier will take a view of the risks, being quite arbitrary in which invoices they will accept, and discount accordingly.

So, finance is both expensive and uncertain.

A new direction

Partly enabled by advances in IT, new approaches to Supply Chain Finance are emerging.

Instead of funding many suppliers, with the invoice as security. Financiers can fund a major buyer to enable the latter to pay their invoices on time. The lender is looking at the creditworthiness of a single well-understood customer rather than a host of unknown suppliers. So, risk is better understood, and premiums are lower.

Through a web portal, the supplier can see when the buyer has approved an invoice for payment. He can wait for the invoice to be paid in full in the normal course of events or, if cash-flow is tight, can call off that invoice for immediate payment, at a much lower discount than under traditional methods.

Blockchain sophistication

The advent of Distributed Ledger, or ‘blockchain’, systems allows further sophistication.

A finance platform can recognise ‘milestones’ against which funding can be offered much earlier in the process. A supplier might call off a part payment on proof that an expensive bought-in component has been received.  Or when the goods have reached a particular point in a journey (like clearing customs for example).

Since such systems are already being implemented to improve control and visibility of the physical supply chain, they might as well be used to accelerate cash flow safely and securely.

Cloud based and blockchain systems as an integrated part of the wider supply chain system can, by accelerating cash flow and allowing staged payments, relieve an important source of supply chain vulnerability.

Lower costs of financing should enable suppliers to offer keener pricing. At the same time, a large part of the invoice approval and payment function can be automated, because payment is directly linked to other processes that are being automated.  This removes a lot of administrative cost and reduces the potential for invoice and payment conflicts.

The concept is endlessly adaptable.  For example, in TGMatrix’ own field of freight transport, there is no reason why the (automated) Proof of Delivery shouldn’t be used to effectively obtain instant payment, securely and fully auditable, without intervention by an Accounts Clerk.

Just imagine how much time and effort would be saved!

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