Much of the focus on SCF benefits is on the working capital improvement that comes from the associated trading term extension. However, SCF touches a number of different parties within the organisations and each of those can extract benefit from a successful SCF program. Here are some examples:
Buyer – Treasury benefits:
- Finance Costs: The Supplier, not the Buyer is charged for early payment of invoices.
- Increased Liquidity: The Buyer has the potential to extend payment terms without adversely affecting the financial stability of the Supplier. The term extension is usually viewed as an increase in trade creditors & not debt on the balance sheet.
Buyer - Accounts Payable benefits:
- Improved invoice approval process: One of the key requirements for SCF to work effectively is that invoices must be able to be approved within a short timeframe. So, if you are exploring an SCF program, by default, you will have or be exploring a program of work that ensures your invoice approval process is efficient.
- Reduced AP enquiry: Once approved invoices are in the portal, they are able to be viewed by suppliers. This supplier visibility over the status of their invoices results in a reduction in supplier payment enquiries.
- Reduced payment risk: SCF programs will generally make electronic payments based on events that have occurred on the platform. This will result in the reduction of manual payment handling & its associated risk.
Buyer - Procurement benefits:
- Reduced supply chain risk: By providing suppliers with the option to take early payment, a SCF program assists suppliers to strengthen their cash flow and generally reduce supply chain risk.
- Form part of a holistic P2P offering: Standardizing and digitizing your process from procurement through to payment will promote straight-through invoice processing and improve control. This enables strategic decision making around the types of solution offered to suppliers e.g. SCF, dynamic discounting, P-Card program or virtual card.
- Stable Supply Chain: Suppliers receiving prompt payment for their goods are able to maintain a healthy financial base and therefore provide a consistent service to the Buyer.
- A supplier-friendly negotiation tool: SCF enables a collaborative environment where a customer and its suppliers can achieve mutually beneficial objectives.
- Improve supplier growth prospects: Offering SCF enables suppliers to access funds they would otherwise have to source from bank loans, equity funding or retained earnings. SCF can, therefore, release working capital, enabling suppliers to grow their business and better meet their customers’ requirements;
- Preferred customer: Suppliers will prefer dealing with a customer who pays on-time or early, so suppliers will become more reliant on those customers as a customer of choice.
- Meet Corporate Social Responsibility objectives: If organisations are prepared to think outside the square and flex their considerable supply chain muscle, then SCF can become a force for social change.
- Sustainability in the supply chain has become an increasing area of focus for large companies (purchasers) as they address competitive pressures arising from new environmental regulations, rising energy costs, workplace standards and other consumer and government demands.
- Many companies have incorporated eligibility requirements, based on social or sustainable practices, into their contractual relationships with suppliers. By explicitly factoring in social, environmental and governance criteria purchasers and their suppliers can reduce operational risks, maintain profitability, and meet the growing demand for organic, certified and ethically-produced goods.
Suppliers who can meet these eligibility requirements are likely to enjoy business growth, however, many are small and medium enterprises (SMEs) that lack the necessary finance to improve social and environmental management and operating performance.
- Access to affordable finance is often a challenge that prohibits many suppliers from complying with the necessary eligibility criteria. Using an innovative SCF program can provide the incentive necessary to improve health & safety, social standards as well as environmental sustainability
Supplier – Treasury benefits:
- Improved cashflow: firstly, they can be provided with the option to seek early payment as a means of raising working capital. Particularly for smaller companies this can be very attractive as this finance is not subject to their own financial standing and can often be available at cheaper rates on the strength of the buyer’s creditworthiness as opposed to traditional methods such as overdrafts.
- Preserve credit lines: In addition, any of their own credit lines can be available for other purposes or to improve balance sheet strength.
- Low cost financing: Supplier access to affordable finance is critical to lowering the overall cost of finance in the supply chain. A well-structured SCF program will provide suppliers with access to working capital finance that is priced on the investment grade risk profile of the buyer.
- Cash Flow Control & flexibility: Suppliers can manage cash flow more effectively as invoices in a SCF program will be paid on time by the buyer’s bank. Faster payments need only be drawn down as and when needed to suit individual cash flow requirements.
- Credit Rating: Suppliers are no longer hampered by their credit ratings. The SCF program is based on the strength of the buyers credit rating.
Supplier - Accounts Receivable benefits:
- Reduce credit exposure: SCF represents an opportunity for suppliers to reduce their credit exposure to their customer by selling that exposure to a bank or financier. This increased credit headroom should represent an opportunity to sell more to that customer.
- Operational efficiency: Invoice level remittance information can be downloaded to make the reconciliation process relatively seamless, so improving operational efficiency.
Supplier – Procurement benefits:
- Negotiate discounts: Suppliers who can draw down on cheap funds from their SCF program can now approach their own suppliers with early payment discount offers.
So, as you can see there is a lot more to SCF than just working capital benefits.
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