How to create an ideal supply chain finance programme

Several tips in unlocking working capital

WITH an objective to expand operations and optimize working capital, a growing list of companies in Asia are turning to supply chain finance programmes such as receivables finance or payables finance to grow their businesses.

Supply chain finance programmes primarily from banks not only give an anchor company’s customers or suppliers payment flexibility but also leaves the company with additional capital to reinvest in the business.

Though beneficial for all parties involved, supply chain finance as a concept has yet to live up to expectations in Asia where both companies and suppliers are unfamiliar with the concept.

According to data from Asset Benchmark Research’s 2019 Treasury Review, only 34% of Asia-based survey participants had an ongoing supply chain finance programme with another 8% expressing that they were about to implement a programme within the next six months.

Key in getting the concept of supply chain financing cemented in Asia is firstly showcasing the ease of execution of setting up such a programme. More often than not suppliers in a payable financing, targeted to be onboarded on a programme, are put off by the financing arrangement if it means filling up tedious paperwork or being forced to open an account at the financing bank.

“We have an ease of supplier engagement as there is no account opening, there is relatively easy supplier documentation just being 1-2 pages to be approved on this programme,” explains a banker from a UK-based bank on his recently implemented supply chain programme.

An anchor company should also insist that the financing bank use its internal data to immediately identify credits in which the bank would be comfortable financing. For instance, in setting up a receivables finance programme a bank could easily purchase an anchor company’s receivables if the bank was already banking the end customer of the anchor company.

Alternatively, the use of trade credit insurance could ease the risk concerns of a financing bank when it comes to purchasing certain receivables. Already the likes of China’s Sinosure and South Korea’s K-Sure have in the past placed insurance coverage on around 90% of receivables on the programmes they had worked on.

While the ease of onboarding suppliers and seamless purchase of receivables are important for any supply chain financing, what is even more impactful heading into the future is the incorporation of ESG (environmental, social and governance) factors within financing.

A typical example could be an anchor company giving incentive-based supplier financing to suppliers based on how compliant they were to ESG standards. This was the case for companies such as Walmart and Pimkie who recently scored and rewarded their suppliers based pre-determined ESG metrics.

Date

28 Feb 2020

Channel

Treasury

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