Corporations trading around the world have long sought ways to optimise their working capital, helping them to secure competitive advantage by increasing liquidity, financing suppliers and investing in growth.
Traditionally, businesses with significant supply chains used trade finance tools such as letters of credit to help bridge the funding gap for international purchases and mitigate the financial risk between the corporates and their suppliers.
However, in recent years, it is estimated that as much as 80% of international trade finance has moved away from letters of credit to trade conducted on an open-account basis.
As global supply chains have grown in complexity, companies are seeking innovative new ways to improve funding across the entire supply chain, looking for solutions that reduce the payment risk and the supply risk for all parties. Many are turning to the latest trend in supply chain – Supply Chain Finance.
By deploying a supply chain finance facility, a buyer can leverage an existing banking relationship to secure extended payment terms with its suppliers. At the same time, those suppliers can request faster invoice payment in return for a small discount. The process benefits both parties in the supply chain, by optimising working capital for buyers whilst improving cash flow for suppliers.
According to Standard Chartered Bank, "Supply Chain Finance holistically funds entire supply chain ecosystems, sometimes as many as several hundred suppliers".
By thinking strategically about the financing of their supply chains, companies recognise that they can reduce complexity, improve cash flow, improve working capital and, ultimately, ensure the more efficient delivery of products and services to their customers.
With multinational corporations exploring alternative solutions to better fund their complex supply chain ecosystems, it's likely that supply chain finance will play an ever more important role – helping to facilitate trade, optimise complex supply chains and allow companies to compete more effectively in an increasingly global marketplace.
Find out more about Mark's Asia Supply Chain Insights.