09 - 04 - 2018 | |
The pace of disruption and change in every industry today is accelerating. For many chief financial officers (CFOs), the challenge is not which projects to fund -- there are plenty of options (e.g., investing in new markets, growing product lines, launching new divisions or pursuing mergers and acquisitions) -- but where is the money to fund them going to come from?
External funding sources, such as debt and equity, are easily accessible to most large companies but can be expensive, dependent on investor sentiment and time-consuming ways to raise capital. Other funding sources, such as reducing capital investment, reduction in force or selling assets, free up significant amounts of capital but require major organizational changes and are likely to cause major disruptions. Thus, these are usually last resorts of capital.
One source of funds that is increasingly appearing on the radar screens of CFOs today is supply chain finance (SCF). SCF allows a company to access cash trapped in its supply chain. There are three primary strategic levers a CFO can pull to access this cash: increase payables, decrease receivables or decrease inventory. There are many different strategies available to pull these levers including factoring, term negotiations, reverse factoring, dynamic discounting, p-cards and letters of credit.
SCF has been around for years, but the rise of cloud-based SCF platforms has impacted SCF programs in three big ways: making them more effective, more efficient and easier to launch. The result is that the benefits of SCF have become available to a far wider range of companies than ever before.
1. SCF has become more effective. Technology may enable more transparency between companies utilizing SCF and their suppliers who participate. Because everyone is on a network and has instant access to the same information, like visibility to payment terms and knowing exactly when the cash is coming, relationships with suppliers may also be improved.
2. SCF is more efficient. Technology has enabled companies to reach out and onboard all suppliers instead of just the top suppliers and extend the benefits of SCF to all suppliers in a company’s supply chain. The result is more liquidity available across the entire supply chain, which could strengthen the buyer-supplier relationships.
3. It’s easier to launch SCF initiatives. SCF providers are able to offer more value to companies through cloud-based platforms that provide a marketplace to source financing, supplier onboarding tools to engage with suppliers and powerful analytics to provide insights on how to optimize their supply chains as well as serving as the system of record
Previously, only enterprise-size companies had the scale and clout to utilize SCF. That’s because most providers of SCF programs were large banks. In today’s SCF, funding has been commoditized and the value is in the technology that connects companies to a broad and diverse set of funders. That, in turn, has meant that a far greater number of mid-market companies (with revenues from $100 million to $1 billion) are able to roll out supply chain finance — freeing up millions in capital to invest in their businesses. These companies are using the proceeds for everything from funding internal investments to grow their business to financing acquisitions and paying down debt.
What should a mid-market company — or any size company, for that matter — look for when evaluating potential SCF providers? Three items should be at to the top of any checklist:
• Does the platform provide multi-source financing? A multifunder strategy provides buyers and suppliers with more sources of liquidity, lowering the cost of funding and diversifying funding options.
• Is it a global SCF platform? Global supply chains need a platform that can match suppliers with funders across all jurisdictions, currencies and geographies.
• How does the provider engage with your procurement team to onboard suppliers? Supplier management and onboarding are critical to the success of any SCF program. Be sure to evaluate not only the technology a platform has but also the professional services and experience the partner has with onboarding suppliers, as you do not want to trust your supplier relationships with just anyone.
Supply chain finance enables companies to unlock resources trapped in their supply chains. It can also give their suppliers the ability to more effectively control their finances by getting cash exactly when they need it.
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