Cash & Liquidity Management

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ING Guide to Financial Supply Chain Optimisation (Part 2) Part 2 of a 3 part series from ING on Supply Chain Optimisation. In this edition, ING discusses the various ways of unlocking value from the financial supply chain and how they can contribute to an appropriate and flexible financing strategy. In addition, looking at some of the new an evolving opportunities for supply chain financing.

ING Guide to Financial Supply Chain Optimisation

Creating Opportunities for Competitive Advantage

Section Four:

Supply Chain Finance

Introduction

Gregory Cronie, Head Sales, Payments and Cash Management, ING

 

In the last edition of TMI, we explored the elements, which comprise the financial supply chain. We looked in some detail at the order-to-cash (receivables) and purchase-to-pay (payables) processes and how these can be optimised to create internal efficiencies, reducing the number of cash days for a company and therefore working capital requirements.

The benefits of automating internal processes are not restricted to internal efficiencies. Reducing the working capital requirement enhances the balance sheet and reduces the need for short term borrowing, improving financial ratios and therefore increasing the ability to obtain financing for more strategic purposes.

Furthermore, once a company has achieved good visibility over their order-to-cash and purchase-to-pay processes, particularly the former, receivables at different stages in their life cycle, including purchase orders and invoices, can be used as a source of financing. With risk pricing very high for many corporates, and demand for credit vastly exceeding supply, particularly for lower-rated firms, tapping into the financial supply chain is an increasingly important means of sourcing finance.

With risk pricing very high for many corporates, and demand for credit vastly exceeding supply, particularly for lower-rate firms, tapping into the financial supply chain is an increasingly important means of sourcing finance.

At ING, we have over 40 years experience of providing both pre- and post- shipment financing to corporates of all sizes and industries. One of the important distinguishing factors of our financing services is that we assess our clients not just on their past, but on their future too. 2009 is likely to be a difficult year for virtually every organisation, which could further damage corporates’ ability to raise finance. However, at ING, we recognise the challenging environment in which every company is operating and look at their strategy and prospects as well as recent and longer term performance. In consequence, supply chain financing with a financial partner that has the vision and balance sheet to support a company over the long term could mean the difference between success and failure during the months ahead.

In this section of the Guide, we explain some of the different ways of unlocking value from the financial supply chain and how they can contribute to an appropriate and flexible financing strategy. In addition, we look at some of the new and evolving opportunities for supply chain financing

Types of Supply Chain Finance

The term “supply chain finance” itself is used in various ways within the industry and can be used to describe:

Asset-based Financing

The process of using the assets created through the supply chain to unlock working capital. This can take various forms, such as selling receivables at a discount to a financial institution or using different stages in the supply chain, such as purchase orders, receivables or inventory as assets for loan collateral.

Buyer-Led Financing

Financing provided by large buyers to their smaller suppliers, working with a financial institution to leverage the buyer’s credit standing to enable suppliers to be paid earlier, supporting suppliers and therefore enhancing the stability of the financial supply chain. It is this type of financing that we will refer to as Supply Chain Financing or SCF during this section of the Guide.

Supplier-Led Financing

Financing provided by large suppliers to their smaller customers, working with a financial institution to leverage the supplier’s credit standing to enable customers to access more favourable payment terms, whilst not jeopardising the supplier’s working capital. In this way, suppliers can encourage customer loyalty and create competitive advantage.

Asset-based financing linked to the physical supply chain is not a new concept. As illustrated in fig 1, there are a variety of traditional techniques for accessing finance both pre- and post-shipment, of which inventory financing, factoring and invoice discounting are well-established methods. However, with the development of eCommerce, which is having an increasing impact on processes in the financial supply chain, such as eInvoicing, there are increasing opportunities available for supply chain financing, particularly in buyer-led financing as we shall explain later in this section.

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