With supply chains becoming increasingly complex, it is now more important than ever for leading organizations to proactively manage supply chain risks and ensure that suppliers have access to competitively priced liquidity.

Supply chain finance is an increasingly popular tool that is used for just that purpose. It is a collection of financing solutions that are linked to certain trigger events that take place in the supply chain (eg receipt of an invoice, approval of an invoice or transfer of title to goods) and is an often-used tool to manage working capital. But, how do you select the right one?

Defining the objective

The most critical task is to be very clear about the objective or the problem you are trying to solve.

If you are looking for a financier to work with you to improve your working capital position or its ratios, then go for one of the many SCF options? Just make sure that you are realistic about how much working capital can be extracted from your supply chain?

However, if you are looking for an EBIT improvement then Dynamic Discounting may be a better solution for you whereby you may utilise your own funds to pay an invoice or account payable prior to the original due date, in exchange for a discount.

Once you are clear on the objective then some key questions to ask are:

• Do you want to use your money or that of a financier?
• Do you want to do it all yourself or work with a partner?
• Do you want that partner to be a bank or bank independent?

The Options available

There are many SCF choices available today and if you don’t believe me have a look at this 96-page report.

Broadly speaking, a corporation has four options when setting up a SCF program. The first 3 are dependent on an extension of trading terms and the 4th is a strategic early payment discount program. So, depending on the long-term strategy, scope, size and complexity of the program, companies can choose the following solutions:

1. Set up its own SCF platform and manage the liquidity with its corresponding bank. In this setup, the buyer processes all invoices and payments as well as manages the onboarding of suppliers. This solution is very costly and time-intensive and has been used by only a few corporates.
2. Single Bank providing a proprietary SCF platform. This solution may work well for well-rated buyers that have access to plenty of liquidity from their chosen bank or their bank can invite other banks to participate.
3. A MultiFunding Model. This involves a technology platform from a 3rd party provider that connects the buyer with its suppliers and a range of participating banks. Many non-bank alternative funding providers are also gaining prominence in these programs so, in my opinion, it provides the best option in terms of funding flexibility and control.
4. Dynamic Discounting. This is the offering of early payment discounts on approved invoices awaiting payment. Dynamic Discounting offers the ability for buyers to choose a rate and offer suppliers discounts calculated on a sliding scale based on the number of days they’re paid early. The earlier buyers pay their invoices, the greater the invoice discount.

Conclusion

Using your supply chain as a source of capital makes a lot of sense, but navigating the minefield that is SCF can be an onerous task. So, it is critical to define exactly what your requirements are. Use this ready reckoner to assist:

	Buyer Impact		Supplier Impact
	Working Capital	EBIT	Working Capital	EBIT
Supply Chain Finance	Positive	Neutral	Positive	Neutral
Dynamic Discounting	Negative	Positive	Positive	Negative

Once you have a clear picture as to which solution you should go for, you just need to pick the right partner to suit your objectives and your requirements.