The singular focus of Supply Chain Financing is to unlock cashflows as fast as possible at optimised costs, and delaying outflows without impinging on business performance and relationships say with suppliers.
• Reverse factoring: The financial institution pays the supplier immediately upon receipt of the invoice, and the buyer repays the institution at a later date.
• Dynamic discounting: Suppliers offer discounts to buyers for early payment of invoices.
There are very many envisaged benefits of supply chain financing programs. These accrue to both suppliers and the buyers. To suppliers, this leads to receiving payments at shorter periods and leads to improved working capital and liquidity. Suppliers are enabled to access low costs of financing( at lower interest rates) as compared to traditional borrowing as the cost is linked to the buyer’ s credit rating. The suppliers( SMEs) ride on the rating of the buyer who has scale and better standing with the financial institutions.
On the other hand, buyers have benefits arising from better and stronger supplier relationship. This is from demonstrated commitment to improving their financial health. Additionally, buyers benefit from improved supply chain stability. This brings about confidence and certainty of supply as liquidity bottlenecks are eliminated and the suppliers can even scale up to meet higher demand or capacity requirements of the buyers. Buyers are also able to negotiate longer payments terms with the financials institutions and improve their own cashflows and working capital. It is therefore easy to conclude that SCF can lead to a win-win outcome for both suppliers and buyers.
Other benefits that SMEs can derive from SCF include increased sales and access to expanded markets. With enhanced access to sufficient working capital, SMEs can growth their product offerings leading to increased sales. Size matters, and with referrals from buyers, SMEs can access wider markets. Another critical benefit from SCF to SMEs is risk management and mitigation. SCF programs provide the SMEs with secure transactions and effective risk management tools. These may include secure payment platforms, risk covers on inventory( for both inputs and finished products), deployment of technology in tracing cargo in transit and tailor-made cash management solutions. SCF solutions incorporate risk mitigation measures to protect buyers and suppliers from
The singular focus of Supply Chain Financing is to unlock cashflows as fast as possible at optimised costs, and delaying outflows without impinging on business performance and relationships say with suppliers.
potential financial losses.
A greater and over arching benefit that SCF can deliver is sustainable growth by enabling SMEs to invest in their businesses and adapt to changing market conditions, as a result of improved liquidity.
Another critical optimizing cash for business operations is through factoring accounts receivables or debtors. Releasing cash from accounts receivables involves a business collecting the money owed to it by customers for sales made on short period. This process accelerates collection of cash back to the cash merry-go-round for the business.
It is worth noting that the conversion of accounts receivables to cash doesn ' t change the total assets on the balance sheet( total assets remain the same). It, however, significantly improves the company ' s liquidity and the ability to meet its financial obligations. Factoring accounts receivable is a financing method where a business sells its unpaid invoices to a third party, known as a factor, for immediate cash. The factor then collects payment from the customer and keeps a portion of the invoice value as a fee. This allows the business to access cash more quickly than waiting for their customers to pay, improving cash flow. This may be considered by SMEs if it is cost effective, and the benefits of collecting the cash earlier outweigh costs.
This is how factoring works. A business sells goods or services to a customer on credit, creating a receivable( debtor) evidenced by an invoice for payment. The business then sells the invoice( s) to a factoring company at a discount. The factoring company provides the business with a cash advance, usually a percentage of the invoice value( e. g. 80-90 %), immediately. The factoring company collects the full invoice amount from the customer ' s payment. The factoring company retains its fee and forwards the remaining balance to the business. The benefits of factoring are similar to those explored under SCF above and can be used to optimise financing supply chains
from the sales side.
SMEs also worry more about inventory availability to meet production or selling opportunities. This is where inventory financing comes into play. Inventory financing allows SMEs to use their inventory as collateral for a loan, helping them purchase goods and manage their supply chains without overdrawing cash. Inventory financing is a type of short-term loan or line of credit where a business uses its inventory as collateral. This approach is particularly useful for SMEs that may have limited credit history or other assets to secure traditional bank loans.
Inventory loans also are a form of financing. Big suppliers offer their inventory to SMEs to support sales and agree to terms of payment after the inventory is sold. Inventory financing can help SMEs manage fluctuating demand, ensuring that they have enough inventory during peak seasons. It can help SMEs to avoid high storage and insurance costs associated with carrying large amounts of inventory.
The cash merry-go-round is the lifeline of business. Making it continue and grow is healthy. Financing supply chains supports optimisation of operating working capital, preserves cash and helps to find the balance and trace where cash is and why it is not equivalent to profits. SMEs are encouraged to have their eyes set on effectiveness of the cash cycle in their business ventures. As they say, profits are opinions, cash is the king! Find the cash in the profits.
CPA Michael Maithya Nzule is the Finance & Strategy Director of Mitchell Cotts Freight Kenya Limited. He holds an MBA in Accounting and a Bachelors of Commerce( Accounting Option Hons) from the University of Nairobi. He is a member of the Institute of Certified Public Accountants of Kenya( ICPAK). Views expressed here-in are personal. You can commune with him via mail at: Mikemaithyanz @ gmail. com.