Supply chain finance (SCF) focuses on a set of solutions and processes which provide liquidity to suppliers through pre-shipment, post-shipment, and post-acceptance financing. Over the last few years, SCF has garnered tremendous attention due to the economic environment which has constricted the cash flow across suppliers, particularly smaller ones that don’t always qualify for loans from banks and other financial institutions.
The following figure from Aberdeen’s March 2013 study, Liquidity and Visibility: Foundations for Robust Supply Chain Finance, highlights some of these key drivers and covers two broad themes:
- Lack of capital / funding
- Managing supplier-buyer relationships
In today’s part I of this five-part series, we will be focusing on this first market pressure — lack of capital / funding — and how dynamic discounting can alleviate some of that pressure by serving as a perfect agreement between the buyer and supplier.
SCF can be easily segmented into supply- and buy-side applications. On the supply-side, the supplier wants access to funding to ensure timely inventory production while minimizing the borrowing cost. On the buy-side, the buyer wants optimal payment terms and possibly to weigh discount options via early invoice payment over interest on cash, if the cash were to be invested somewhere else. The latter view is what dynamic discounting is all about and as such it is an excellent way for buyers to realize incremental cost savings which are far greater(on an APR basis) than if the buyer were to invest that amount in the bank, especially given current interest rates.
Dynamic discounting is particularly valuable for SCF today as the nature of transactions have shifted from low frequency, high value to high frequency, low value. Therefore, suppliers are looking for frequent capital inflow and buyers need agreements, such as dynamic discounting, which allow them to support their suppliers on an on-going basis without over-straining their own resources.
Additionally, due to the increasing maturity of procure-to-pay (P2P) automation, the ability of organizations to process invoices and pay much more quickly has been a nice compliment to the dynamic discounting program. High frequency trades require greater financial oversight and management and tools such as eInvoicing within P2P offer necessary support to that end.
In part II of this blog series, we will continue this discussion by diving a bit deeper into eInvoicing, automated payments, and their impact on SCF. If you have any comments or thoughts to share, please feel free to reach out to me at email@example.com
Until next time,