Cash is king. But what if there’s a shortage of it, and it takes your business 30, 60, or even 90 days before getting paid? These kind of payment terms are standard practices between most goods suppliers and buyers in Asia, and it has direct impact on their cash flows and ultimately their financial health. The key to solving this issue could very well be found in the rise of a receivable finance technique called Supply Chain Finance (SCF). Not only does it benefit suppliers, but it also brings great opportunities to their buyers as well as to the banks and financial institutions that facilitate this initiative.
What is Supply Chain Finance?
SCF allows suppliers to receive early payments on their invoices through a financial institution, minus commission. Unlike other supplier finance techniques, SCF is initiated by the buyer, not the supplier.
This particular financing option has been gaining popularity for some time, and it is not surprising given the convenience and protection it adds to business transactions. It is a triple-win situation for all parties involved: the buyer, the supplier, and the financial institution. The buyer can negotiate longer payment terms while generating revenue in the meantime. The supplier can access immediate working capital and take advantage of this early influx of liquidity. The financial institution runs the due diligence on both counterparties, facilitates the transactions, and charges a commission for services.
What to look for when considering supply chain finance?
Photo credit: Vithun Khamsong
Simply put, SCF processes are not overly complicated in their nature. One of the main advantages of SCF, especially for smaller suppliers, is that they can optimize their working capital and better manage their liquidity. Suppliers have access to lower costs of funding than if they used other receivable finance techniques like factoring. It improves the supplier-buyer relationship, and in turn, gives buyers stronger negotiating powers.
As for the drawbacks, of course, the fee that the supplier is required to pay to a financial institution is a reduction in their profit margin for each invoice. What’s more, for some specific suppliers, receivables financing can have a higher finance charge than contracting a standard line of credit from a bank. It is for the supplier to decide between receiving the money now minus the fee, or receiving the full amount on the invoice due date. For both buyers and suppliers, the process of SCF might be labor-intensive if done manually. Digitalizing and automating the process is crucial, and so is choosing the right software.
The Growth of Supply Chain Finance in Asia
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SMEs are the driving forces of many economies in Asia, and facilitating their access to different receivables finance techniques such as SCF is crucial for them to stay competitive in local and regional markets. In the ASEAN region, the growth in SCF started before the pandemic and continued throughout, despite the drastic consequences it had on the whole supply chain.
Within Southeast Asia, growth is seen in the Philippines, Malaysia, Thailand, and Vietnam. Actions conducted by banks and financial institutions, such as the Trade & Supply Chain Finance Program by Asian Development Bank, helped SMEs become part of a global trading system. Several regulations in the Philippines, and more broadly in Asia, facilitated numerous SMEs to easily access credit. Unlike large corporations, SMEs have long experienced difficulties accessing funds from financial institutions and such positive actions show that there is a will to help and improve the state of SMEs development.
The need for Digitalization
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Despite all of this, only a few banks are ready to serve their SME clients and it could be a huge missed opportunity. While companies used to onboard their top 5 or 10 suppliers within their SCF program, new digitized solutions now enable companies to offer SCF to all their suppliers, no matter if there are thousands of them. This is possible thanks to cloud-based platforms which fully automate the different processes to reduce human interventions and achieve greater efficiency.
There are a few issues that have to be taken care of to successfully handle SCF transactions. More banks in ASEAN have to jump on the bandwagon and lead the market toward new receivables financing options such as SCF. At the same time, there is a need to educate SMEs about this new financing option, along with numerous other receivables financing techniques, such as factoring in its many forms.
Investing in the right Supply Chain Finance platform will help eradicate most human errors and long delays that companies previously encountered. More so, the use of a dedicated digital platform is critical to ensure a successful SCF program is being brought to the masses, even to those that aren’t aware that they need it, just yet.
Luigi Piccolo, Business Development Manager at Comarch, Thailand
Written by: Luigi Piccolo, Business Development Manager at Comarch, Thailand. Reach him via email at Luigi.piccolo@comarch.com
ADVT.