What is Supply Chain Finance?
Supply Chain Finance is a set of solutions that optimizes cash flow and working capital by allowing buying organizations to lengthen their payment terms to their suppliers, while also providing an alternative option to their suppliers to get paid early. This results in optimized working capital for the buyer and enhanced cash flow for the supplier, while minimizing risk throughout the supply chain.
The key characteristics of Supply Chain Finance
- Financial & Accounting Implications – From the Buyer’s side this is considered as an extension of account payable and according to IFRS can be kept as account payable and not considered as a debt. As from the Supplier side such receivable financing, this is treated as off-balance sheet and represent a true sales of receivable.
- Multi-Banking Engagement –UbiQ provides a multibank capability by providing availability to several local domestic as well as Global/ International financial institutions to fund a specific Buyer’s Supply Chain Finance Community.
- Supply Chain Finance Influence – Supply Chain Finance provides value for firms of all sizes. It engages in a first stage anchor Buyers to lead the program and invites all Suppliers (SMEs) to participate.
- Supply Chain Finance may be Bank Independent – For Cash-Rich Buyers: Self-Funding programs are possible, enabling a Dynamic Discount model.
- User friendly platform enablement – UbiQ OpenSCi platform is cloud based easy to manipulate. It offers the Buyer visibility on their payables. And enable the Supplier to trade their receivables while engaging the Financial Institutions to fund such transactions.
- Factoring Versus Supply Chain Finance – Under Supply Chain Finance: No recourse burden on the supplier once the invoice is paid. 100% of each invoice is financed less the transaction fee. As well the Buyer benefit from a working capital optimization.
How does it work?
Company X is purchasing from thousand of suppliers all over the world with average payment terms of 45 days, generating annual cost of sales of $3 billion. Company X wants to increase its cash flow by paying its suppliers later. The company’s goal is to generate $120 million in cash flow gain by extending terms from 45 to 60 days. Calculations: $3 billion x ((60 – 45) / 365)) = $123 million
- Need to improve working capital
- Company X does not want to increase risk of supply chain disruptions by extending payment terms
- Company X is worried about a negative impact on the price of goods and services it is purchasing from suppliers
- Supplier financing serviced and processed by SCiSupplier
- Using centralized payments to funder(s) managed on SCiSupplier
- Full support, legal documentation and supplier onboarding provided by UbiQ Innovations
- DPO↑, A/P↑, Working Capital↓
- Slower outbound cash flow (+$120 million), due to extended payment terms (+15 days)
- Not considered a financial debt but an extension of accounts payables
Who benefits from Supply Chain Finance?
Supply Chain Finance connects the buyer and his suppliers to the funder(s). All three participants of the Supply Chain stand to gain.
- The Buyer is optimizing his working capital and freeing up cash flow while extending payment terms
- The Supplier is getting quick access to finance at reduced rates
- The Funder(s) gets access to a group of new suppliers and has some opportunity of cross-selling while getting closer to its customers.
The UbiQ Innovations team works closely with buyers, suppliers and funders to craft a supply chain finance plan that fits the evolving needs of all parties. Contact us today to find out how we can best serve your needs.