How to Create a successful Supply Chain Finance Program?

July 11, 2023

When it comes to agreeing upon a suitable credit period for trade transactions between a Corporate buyer and their suppliers, there is often a tussle to arrive at a consensus. A supplier often seeks to get paid as soon as possible while the buyer would want to extend the Days Payable Outstanding (DPO) as much as possible to improve their respective balance sheets and working capital.

Supply Chain Finance (SCF) programs can help reconcile such conflicting interests and play a significant role in optimizing working capital finance for both the suppliers and the corporate buyer.

However, more often than not, corporate buyers struggle to reap benefits from such programs as they never attain the scale they should, to create a meaningful impact.

Let us look at some of the nuances of a successful Supply Chain Finance Program

1. SCF is not a one-size fit all product

Often concluded about finance programs is that they cannot be standard across industries and ever-changing contexts, and it is applicable to SCF programs as well. Given the different nature of businesses and desired outcomes that a supply chain finance program can lead to, the structure of the program requires attention to all the critical variables. An SCF program must be customized to meet organizational objectives whether it is to extend credit period for the corporate buyers, assist vendors to access low-cost capital, or streamline payments.

2. SCF Programs need to be aligned with all stakeholders

For an effective SCF program rollout, it is necessary to have a buy-in from more than just the finance and compliance teams. Technology and Supplier relationships are key to the success of SCF programs. As a consequence, IT and Procurement teams owning the respective functions must be involved from Day 1. Procurement should be made aware of the program, the objective behind its adoption, the terms offered to the supplier, and implications, if any, so that they are well-equipped to manage any concerns or objections from the supplier promptly.

3. SCF programs should partner with the right Financial Institutions

A vital element of a successful SCF program includes choosing the right financial partner or partners. Financial partners play a crucial role in working together with the corporate to build reach to the vast supplier network. They also provide guidance and hand-hold suppliers to make the most out of the program. It is usually not advisable to rely on just one financial partner as the dependency becomes too high, and the reach restricted to the financial partner’s capabilities.

Many a time, corporates opt for SCF programs with a consortium of banks led by a lead banker. These programs also face similar difficulties as a single-partner SCF program in scaling up, as it is heavily dependent on the capability of the lead banker.

4.   SCF is more than just about commercials

Corporate Buyers often quote pricing as a limiting factor to justify the lack of success of SCF programs. However, the success or failure of an SCF program is based more on the strength of the supply chain relationship rather than just the commercials. A supplier having a large share of sales with the corporate, which is offering a Supply Chain Finance program, is more likely to value the relationship better. Suppliers prefer such access to SCF as they can now recover a large portion of their receivables much quicker. This then incentivizes the supplier to increase their share of business with such corporates further strengthening the relationship.

However, if the sales are not as significant, to begin with, then the supplier fails to see the impact of going through the hassles to avail such limits. For the success of an SCF program, it is crucial to strengthen the foundation between the corporate and the supplier and initiate the program with priority vendors to gain momentum.

5.   SCF programs must leverage technology

Technology plays the most critical role in the success or failure of an SCF program. It is imperative to set up effective processes and workflow that does not add further burden to the corporate finance teams. In a digital world, SCF programs that require manual efforts of intimation, acceptance, or reconciliation have no place.

Successful programs require your SCF partner to equip both systems of the corporate and the supplier to directly communicate with the network of finance providers to ensure seamless processing of transactions. Digitizing right from integration with corporate ERP to automatically receive accepted invoices, financing suppliers, until settlement and reconciliation, ensure that the involvement of the finance team is directed towards core activities to run your business rather than pursuing mundane tasks.

Reach out to us to know more about how Cashinvoice can digitally transform your SCF programs.

A robust supply chain finance program with aligned objectives, automated processes, and the right partners have the potential to strengthen corporate-supplier relationships and optimize working capital dramatically.