What are the advantages of supply chain finance and why is it better than factoring? How can a bank learn more inside information about a corporations strategic operations so that it can be made a contributor to the model for corporate business?
Even though supply chain finance or SCF has been given the status of a product category which is fully-fledged a lot of banks and other financial institutions still have a very long way to go in order to set a standard for the procedures related to supply chain finance and the way it is handled.
For example, lately there has been some confusion related to the use of the term reverse factoring when it comes to supply chain finance. For the financial institutions which run both financial operations and the more contemporary banking divisions this dispute related to simple terminology is not trivial at all.
When it comes to very high levels, the form of supply chain finance which is most common is the financing of certain receivables after acknowledgement of debt that is provided by the buyer. This operation shares several important characteristics with the so-called controversial reverse factoring. When the transaction is disclosed the buyer needs to confirm that the invoices which are represented are actually valid and the supplier has not fabricated them. If we examine this in more detail there are certain important differences between factoring and supply chain finance that should not be underestimated.
Trade and cash come together
When it comes to supply chain finance, the financial aspects are very often combined with the requirements for cash management of the buyer. The corporate treasurers seek banks which are able to receive very big amounts of data about the payables and then turn them into discounted payments for a supplier. In case the financing offers are not accepted or are not offered, the funds should be disbursed punctually at maturity.
The processes offered by the banks need to be highly efficient and the account of the buyer should be handled the way they want it to be handled if requested specifically. The mechanism for exchanging payments should be very good. This means that the bank should play the role of the payer and give the money to the seller instead of the buyer having to give it to them at the time of the purchase. This way any payment risks are usually avoided and the money can later be collected by the bank from the buyer when the clients receive their goods and pay for them. In some cases even the bank becomes the one to handle the clients and get the money from them when the time comes. Factors such as over dues and dilutions which are common for other kinds of transactions are eliminated when it comes to supply chain finance and so they are no longer a problem that needs to be acknowledged. The process is highly efficient and the benefits from it for the businesses and the banks are great.