Supplier finance – the practice of providing low-cost finance to suppliers as part of a flexible settlement system – is becoming a central element of an integrated financial supply chain strategy.
The efficiencies created by such schemes can provide sustainable cash flow benefits to buyers and their suppliers. Indeed, the win-win scenario created by supplier finance schemes has seen the number of such products increase rapidly in recent years.
The principal benefits that accrue to buyers and suppliers come in the form of improved management of working capital. Buyers can benefit from extended supplier credit terms or discounts for early settlement while suppliers gain instant access to cash payment for their invoices as soon as they have been approved for payment.
Qualitative benefits are also apparent. Strong reciprocal relationships of trust and loyalty can be developed by buyers offering finance solutions to their suppliers. Indeed, buyers that do so are providing added value to their suppliers while strengthening their own negotiating position. Additionally, offering flexible settlement terms should attract more suppliers who will be better financed and therefore healthier suppliers in the longer term.
The growth in supplier finance solutions – usually offered by banks through buyers – has been driven, in part, by shifting patterns of global trade.
Emerging market production has recovered from the financial crises of the 1990s, allowing trade between these regions and the developed world to grow at around 13 per cent a year, according to SWIFT, the secure bank payments interface.
The nature of these flows has also changed. The relatively improved position of emerging markets has meant that capital goods are just as likely to be flowing from the developing world to the developed. Also, the strengthened position of developing world suppliers has led to many purchasers in the developed world coming under pressure to offer favourable financing solutions to those suppliers.
Another driver has been developments in IT which have made supplier finance initiatives more effective and easier to implement. Leading trade finance banks have developed powerful electronic platforms with the ability to automatically offer supplier finance solutions at trigger points in the supply chain.
For example, Deutsche Bank has developed an online platform for customers called db-SupplierFinance. This allows buyers to offer their suppliers competitive financing solutions, complemented by db-eBills which allows electronic invoicing, and InfoTr@ck which places all supply chain-related information online and is accessible by all relevant parties.
Yet while automatically triggered supplier finance offerings are effective, the greatest benefits of financial supply chain management are realised when a buyer seeks to restructure its financing arrangements across the whole of its supply chain, wherever the supplies are sourced from.
This is becoming a more common choice among corporates and is perfectly feasible provided the buyer has deep and stable relationships with both banker and suppliers. The buyer’s bank will then be able consider the entire supply chain and construct a system to deliver the correct financing at the correct points.
Axel-Peter Ohse is Deutsche Bank’s managing director of trade finance in Germany