What is SCF?
Supply chain finance (or SCF) refers to a funding program implemented by a buyer to provide early payments to his suppliers. It is, maybe, a US$1 trillion industry today.
It typically works like this:
- The buyer teams up with one or banks, who provide a finance facility.
- Suppliers are asked to lengthen the terms of their invoices – for example, to 120 or 150 days.
- The SCF facility is drawn by suppliers (exporters) to receive early payment on the invoices that they are owed.
- Early payment is available when invoices are approved (usually 7-14 days after delivery of goods).
- Suppliers have a cost for using the facility, usually agreeing a small discount on the face value of the invoice.
The SCF program is centrally managed, set up to provide finance to the supply chain.
Why is this important?
Supply chain finance can be an alternative to export finance and can often be cheaper for those suppliers who can access it. Many larger buyers have recognised that:
- it is important for suppliers to have good access to working capital, and
- the cost of working capital in the supply chain ultimately gets passed on to the buyer in the cost of goods
By arranging SCF programs, buyers are supporting their suppliers and also intelligently using their own credit strength to ensure that suppliers have access to low cost working capital.
This makes supply chains more reliable and reduces costs overall.
Does SCF work for suppliers generally?
Superficially, yes. But suppliers have two main complaints:
- Availability: The program may have limited availability. This is (a) in respect of available funds (which get used up quickly) or (b) because of there are minimum supply volumes for eligibility or (c) geographical limitations related to compliance and know-your-customer procedures, excluding suppliers in distant export locations. SCF is usually not equally available to all suppliers.
- Default risk: The program is uncommitted to suppliers. If the buyer gets into difficulty, the program is withdrawn and suppliers can take a big hit. They have lengthened the terms of their invoices. This is not just because their cash flow gets disrupted – but also because they are then also locked in to funding the buyer themselves, just when the buyer is running into trouble (and may get practically no recovery in a bankruptcy if this happens).
The second point is most important. For example, suppliers to Carillion ended up with much bigger losses because of the SCF program. Carillion was a large UK service business that went bankrupt in 2018. Suppliers extended the terms of their invoices and were relying upon the SCF program for early payment. The SCF program was withdrawn a few months before the bankruptcy happened. But the suppliers were left with 120 day invoices, no early payments and then no way out when the buyer went down.
Does SCF work for exporters?
Most SCF programs do not work for exporters, particularly if they are in emerging markets.
There are three main reasons:
- The money comes too late. It is needed at shipment not after delivery.
- Programs often are not available to exporters in emerging markets because lenders place limits on geographies and restrict programs to larger suppliers only
- There is no LC capability, and LCs are required by exporters in some markets.
Can you combine trade finance with SCF?
Yes. This is Supply Chain Trade Finance.
PrimaDollar trade finance products can be added on top of buyer SCF programs, so that the benefit of low cost SCF money (if available) is combined with the additional services that exporters need.
- No more LCs
- Lower intake prices as exporters get financed from shipment
- Using our staged payments (X% a shipment, y% at delivery, Z% later), the risk of over-payment to a supplier is reduced.
- Integrated support for credit notes within the platform
- Integration of shipping documents alongside commercial documents – leading to process and cost savings for the buyer.
How can I find out more?
With a global network and global coverage, talk to us.