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SCF for International Trade: Exploring New Frontiers

Published  3 MIN READ

Cash management is critical for any business, as are well-managed operating costs and productivity, not to mention more efficient processes and relationships with suppliers. Supply chain finance (SCF) programmes tick all the boxes in delivering the above.

Big retailers globally have successfully implemented SCF programmes for more than a decade, with many taking advantage of digital SCF platforms to do so. These help retailers to engage with their thousands of suppliers in processing and approving invoices. Additionally, one of the main benefits to suppliers is that SCF usually enables them to be paid earlier. This helps both parties. The retailer can support its smaller suppliers with enhanced cash flow/liquidity at the same time as enjoying a discount from the gross invoice value by settling it early.

Digital SCF platforms also can provide a much easier route to dealing with overseas suppliers. The retailer, as an importer, may have hundreds of foreign suppliers, which means they deal with myriad shipping documents and payments, and maybe have to pay at sight without enjoying extended credit/usance terms from the exporter/supplier. Sometimes expensive letters of credit (LCs) are required, especially from smaller buyers importing cross-border, or the supplier may have a policy of payment only by LC.

The workload of managing exporters/suppliers is time-consuming. They may have different payment terms, different payment mechanisms/instruments, different shipping documents, and many other nuances. The solution, in my opinion, is to implement an SCF platform, typically software-as-a-service (SaaS) that supports the management of all exporters/suppliers enabling the buyer to turn all exporters/suppliers to open account trading, and manage all shipping documents digitally. This will save many hours’ work and streamline the process of managing exporter relationships. It will also simplify the payment process by turning the payment of foreign suppliers into a domestic/local relationship at the same time as making considerable savings due to the elimination of LCs and other money transfer costs.  

This year has seen the growth of an extended version of SCF for international trade – supply chain trade finance SCTF. As already discussed, it has always been difficult to standardise payments out to international suppliers due to the wide variety of supplier requirements. But the new SCTF platforms from companies such as PrimaDollar.com deliver a hybrid solution – all the flexibility of trade finance with all the standardisation of SCF – and they promise savings of up 2% or more on the costs of landed goods.

With this kind of impact, this is something that should be high on the agenda for all corporate treasurers and CFOs in 2021. These SCTF platforms can be provided solely on a SaaS basis and, in some cases, also provide a ‘servicer’ arrangement carrying out checks such as know your customer/anti-money laundering (KYC/AML) on suppliers and document management. It’s an attractive proposition.

Putting SCF into motion

There are different SCF models available to larger buyers.  In these cases, the SCF platform can be integrated into the buyer’s business with four variants depending on cash resources:

  1. The buyer pays suppliers using their funding/treasury – utilising their cash resources to pay suppliers thereby creating additional revenue and return on capital from the Discount Fee for paying the invoice early.
    
  2. In partnership with one financial institution that pays suppliers – the buyer’s bank  maybe, or a trade financier, private debt fund, or a similar entity. We call this a one-to-one programme.
    
  3. The third option is to have a one-to-many programme involving one buyer and many banks and financial institutions providing the funding to pay suppliers. This option may best suit a large buyer where one financier/bank would be overexposed, so the funding is shared.
    
  4. The final option is a many-to-many platform where the buyer is one of many uploading invoices to be paid and many financial institutions are funding the suppliers. This can also be set up for the buyer’s trade/accounts receivables to obtain early cash against their outstanding debtors rather than using invoice factoring or an invoice discounting facility. Usually these many -to-many platforms do not lock the buyer into long contracts and can be used when the buyer’s cash flow requires additional liquidity.

“Today’s corporate treasurer would be making significant steps towards improving their cash management processes by giving extra thought to SCF options.”