Various forms of supply chain financing have been around for centuries. The use of networked platforms is a much more recent trend that enables dramatic reductions in the cost of capital compared with traditional approaches.
The term ‘Supply Chain Finance’ is used in different ways by different people. Many people use it to mean specifically a Reverse Factoring or payables-based program (a bit more on this below). Others use it to include receivables financing. In this series, we use the broadest definition of Supply Chain Finance (Figure 1) which includes all the variations of post-shipment financing (e.g. receivables/payables financing, VMI1-financing, in-transit inventory financing), as well as pre-shipment financing. In most of these cases, the buyers’ creditworthiness is leveraged to reduce the suppliers’ cost of capital, via a firm P.O. or other form of commitment from the buyer to purchase and pay.
Figure 1 – Our Broader Definition of ‘Supply Chain Finance’ is End-to-End
Financial Service Providers
In this article, we are not talking about supply chain financial service providers generically (e.g. commercial banks, trade insurers, credit agencies, etc.), which are numerous, but rather focusing on those that provide supply chain finance networked platforms—i.e. financing services based on a platform that connects a network of the players, usually including buyers, sellers, funders/banks; and sometimes also including credit insurers, inspection firms, and others.
The most common supply chain finance networked platforms are receivables financing platforms. There seem to be fewer platforms available for the earlier stages (pre-shipment, in-transit/VMI) of supply chain financing. This may be in part due to the lower risk of receivables financing compared to pre-shipment or in-transit inventory financing because the goods have already been delivered. Receivables financing has been available for centuries in various forms. For example, factoring—where a business sells its receivables at a discount to a third party, called a ‘factor’—has been in use for at least 600 years. Factoring provides over $2 trillion of financing globally each year (more than 4% of global GDP), providing a tremendous amount of additional working capital to businesses. However, factoring can be expensive. Factoring rates have averaged about LIBOR2 + 2.5% over the past couple of decades. Lowering the cost of borrowing is one of the prime motivations for establishing receivables networks. By providing an efficient mechanism for funders to find, evaluate (buyers’ creditworthiness), and bid on receivables, it creates a more efficient market and lowers the cost of borrowing considerably.
Reverse factoring, which is also called ‘Supply Chain Finance’ by some, is a variant whereby the buyer creates a program to enable their suppliers to obtain financing, usually based on the buyer’s payables (i.e. suppliers’ receivables).
Networked (Many-to-Many) vs. One-to-Many Supply Chain Finance Platforms
There are very few true networked supply chain finance platforms—i.e. those that connect many-to-many participants. Most supply chain finance platforms are one-to-many.
Figure 2 – Many-to-Many vs. One-to-Many Supply Chain Finance Platforms
Some confusion arises because the word ‘networked’ is overloaded with multiple meanings. Some providers may argue that the solutions they offer are networked platforms because they connect multiple players via the internet. But they require a separate ‘network’ for each of their buyers’ clients.3 Here we use networked to mean multiple buyers, suppliers, and others—all sharing the same network regardless of which buyer is involved. This reduces the cost and effort of on-boarding suppliers and others, as well as potentially expanding the pool of funders for finance.
This is not to say that there isn’t a place in the world for one-to-many platforms. They provide a level of customizability that might not be available in the many-to-many world. This customizability is essential for some situations, such as when buyers want to set up their own unique supply chain finance program or a bank wants to provide a specific offering to its clients. Furthermore, some people may be wary of security concerns in a many-to-many platform where many of their competitors are also connected.4
Below are some of the true networked (many-to-many) supply chain finance platforms available.
Ariba—Ariba offers a complete set of supply side and buy capabilities. In addition to Invoice Management, Payment Management, and Discount Management, Ariba provides Receivables Financing and Supply Chain Finance. Their Receivables Financing is done through a partnership with The Receivables Exchange (see below). Ariba’s Supply Chain Finance enables buyers to create a financing program for their suppliers. Buyers send approved invoices to their suppliers who have the option of selling those receivables at a discount in exchange for early payment. Third party funders offer to buy these receivables at a rate that is based on the buyer’s creditworthiness (often reducing the cost of financing for the supplier). When the invoice is due, the buyer pays and the full payment goes to the funder.
GSCF (Global Supply Chain Finance)—platform connecting buyers, suppliers, banks, and trade credit insurers that enables suppliers to receive accelerated payment at a discount and buyers to make delayed payments for a fee. As part of this service, GSCF rates buyers’ financial statements and tracks in real-time how often buyers are paying on time. That information is made available to funders, insurers, and suppliers.
The Receivables Exchange (TRE)—an online marketplace where businesses can sell their account receivables to accredited investors in real-time auctions. TRE has partnerships, integrating with two of the procurement network platform vendors, Ariba and Coupa, mentioned in Part 2A of this series. Firms using TRE can access capital in as little as two business days, on flexible terms.
Smyyth Networks—This is not a funding service, but rather a network-based tool to help measure a buyer’s creditworthiness. Traditional social-peer-credit groups (or credit circles), consisting of trusted peers sharing their payment experience. These provide for depth of discussion, but require travel, time, and have access to a limited pool of anecdotal data. Internet-based peer-credit circles overcome the travel issue, but still provide a rather limited pool of data. Smyyth Networks is a trade credit interchange that aggregates, scores, rates, and interchanges objective credit accounts receivable payment data on millions of companies, organized into industry-specific credit circles. It is a component of Smyyth’s broader offering of Credit Management, AR, Profit Recovery, Collection, and Credit Insurance services.
One-to-Many Supply Chain Finance Platforms
Demica—provides consulting services and a platform for doing complex, cross-border trade receivables securitization and reverse factoring/supply chain finance.
HBSC—HBSC’s Global Banking and Markets division offers a range of pre- and post-shipment financing for both documentary credit and open account-based trade. They also offer a platform for automating various trade documentation and trade services.
JPMorgan Chase—Through its acquisition of Vastera, JPMorgan has built an online platform to fund and manage end-to-end trade activities. The platform provides tools to manage Letter of Credit and Open Accounts, Bank-to-Bank reimbursement, automation of document preparation, and tools for partners to manage their clients’ trade payables/receivables processes. JPMorgan Chase also provides a broad range of supply chain financing services, including supplier financing, receivables financing, and both pre- and post-shipment financing.
Orbian—a platform that enables buyers to set up financing programs for their suppliers. The buyer selects lenders to participate in the program. Suppliers are then able to sell their receivables (for that buyer) and obtain accelerated discounted payment.
PrimeRevenue—a platform allowing buyers to set up financing programs for their suppliers. Buyers upload approved invoices and suppliers can sell the receivables to a PrimeRevenue Financial Institution Partner in return for advance payment. As with Orbian, PrimeRevenue provides an open platform that allows multiple banks to participate in a buyer’s SC finance program.
Syncada—A joint venture between Visa and U.S. Bank, Syncada provides an open, global payment network that banks can use to offer payables, receivables, global trade services, and supply chain finance services to their clients.
UPS Capital—provides a variety of services including in-transit inventory financing and receivables financing. The use of UPS’ ground, ocean, air freight, and customs brokerage services provides visibility and control that can be used when securing financing. UPS’ expertise in logistics and network helps them to offer these services.
Supply Chain Finance is a dynamic space with new services, approaches, and technologies constantly emerging. The use of networks has helped to connect buyers, sellers, funders, and others, resulting in lower cost of capital, lower transaction costs, reduced supply chain cycle times, and increased supply chain efficiencies.