| January 31
What is Trade Finance ?
Cash flow is the lifeblood
of a business – and managing cash flow is fundamental for the long term
viability of any business, especially companies in the SME segment. Maintaining
adequate liquidity at all times and at the same time it is important to focus
on the cost of funds.
Traditionally, companies which are
involved in cross border trade (exporters & importers) Letter of Credit and Performance Guarantees
from Banks is the primary source of financing Working Capital needs. Not many
people are aware that companies involved in cross border trade can access
alternate means of financing through AIF Funds and Export Finance corporations
located in the various countries. In our series on “Trade Finance” we would be like to share how companies can benefit
by availing funds through Supply chain finance “SCF”
SCF offers a solution, as it provides a robust way of
bridging the gap between incoming and outgoing payments. SCF is, in essence, a
means of optimizing working capital and reducing supply chain risk.
SCF connects buyers, sellers
and financial institutions onto one platform. This optimizes working capital
for both buyers and suppliers; it helps buyers accelerate cash flow, and gives
suppliers access to lower financing costs as well as providing visibility into
outstanding customer invoices and timing of payment.
This has several benefits.
For buyers it can improve financial metrics such as days payable outstanding
(DPO), as well as freeing up cash that would otherwise
be trapped in the financial supply chain – cash that can then be invested back
into a business to fuel growth. For suppliers, SCF can mitigate the effect of payment term extensions
and help accelerate their own cash flow.
For businesses operating on
thin margins, the ability to improve cash flow without increasing debt can be
invaluable – even multinational giants such as Nike and Volvo have reaped the
benefits of SCF in recent years.
Supply Chain Finance - An elegant solution
Freeing up working capital
is perhaps one of the best ways for a company to achieve growth, both by
improving access to ready funds and by building stronger, healthier
relationships with suppliers. These kinds of relationships, based on mutual
trust and good will, can give businesses of all sizes a real competitive edge,
not just when it comes to procurement, but at every stage of the supply chain.
summarise, Supply Chain Financing, which could result in huge savings in cost
of working capital which can be as high as 50% in certain cases. The initiators
of it have to be the large companies and it helps in the growth of net sales.
Implementing Supply Chain Financing also disproportionately benefits the
smaller companies. However, if the large companies don’t do it, it raises the
cost of financing so much, that it cripples the entire system.