CFOs need to unlock the cash that is trapped inside the supply chain.

Companies recognize the importance of working capital management to support their business during challenging times. Thus, numerous executives begun to look across their financial supply chain for opportunities to unlock trapped cash. In fact, generating additional cash flow through better management of working capital is a route that is being adopted by most leading organizations across Europe. With numerous examples of successful implementations in the marketplace, Supply Chain Finance has become one of the most important solutions to unlock working capital, improving competitiveness and generating billions of dollars in free cash flow for best in class companies and their suppliers.

Supply Chain Finance is a solution that helps  meet corporate objectives including:  Working capital, EBITDA, supplier financial risks. It allows companies to increase their payment terms and/or provide the option to their suppliers to get paid early. Having made the leap from niche to mainstream, Supply Chain Finance is considered by many companies as an important solution to generate liquidity and a significant instrument to optimize working capital.

 In today’s market, there is a very strong demand for Supply Chain Finance from large buying organizations as well as their suppliers. Companies from various industries have already implemented Supply Chain Finance programs and achieved more than $50 Million in cash flow within a few months. Many corporations realize that Supply Chain Finance is not only about improving their working capital but also reducing the risk in their supply chain and improving their relationship with their trading partners.

Additionally, governments are recognizing the importance of providing ongoing liquidity sources to local businesses and boosting the use of Supply Chain Finance as an innovative way to ease the funding squeeze for many smaller companies. In the US, the Export-Import Bank provides credit support for various Supply Chain Finance programs in key US industries. During the recent crisis the government in Germany provided guarantees to support Working Capital Finance solutions, while the UK government has launched a Supply Chain Finance scheme, designed to deliver up to £20 Billion in low-cost financing to small businesses.

How does Supply Chain Finance work?

Supply Chain Finance allows a buying organization to optimize its payment terms to its suppliers and improve its working capital. At the same time, it gives the option to its suppliers to receive early payment based on attractive financing rates. The funding rate is based on the buyer’s credit worthiness or rating rather than on the supplier. In practice, the supplier submits the invoices to the Buyer in the normal way for approval once a commercial transaction is concluded.

The buyer approves the supplier’s invoice for payment and electronically transmits the payment instruction to a Supply Chain Finance platform. The Supplier is notified and has full visibility on future dated receivable on the platform. The Supplier has the option to trade his invoices immediately and get access to cash by a funder or, alternatively, can choose to wait until the invoice is due. On invoice payment due date, the Supply Chain Finance platform retrieves the full amount of the invoice from the Buyer in settlement of any discount or (if discount has not taken place) effects payment to the Supplier

In Europe, Supply Chain Finance has gained significant importance over the past several years. While the European Union directive to limit the time corporates have to make payments in commercial transactions will bring relief to some suppliers, many buying organizations will still face higher debt and lower liquidity. Supply Chain Finance is an effective way to manage working capital efficiently under the EU late payments directive

There are 3 driving forces behind the rapid growth of supply chain finance programs. The globalization has increased the risk in supply chains and the impact on the financials of corporations.

At the same time Working Capital Management has risen at  the top of the CFOs’ and Treasurers’ agendas. And there is a growing interest from suppliers regarding the provision of liquidity and enabling lower financing costs.

CFOs need to understand the way Supply Chain Finance can help their business. A good way to start is to visit http://tinyurl.com/SupplyChainFinance