Risks in supply chain programs and how to mitigate them?
An integrated supply chain finance (SCF) program offers a win-win solution to all trade parties and ensures continuous, inclusive, and seamless working capital financing. A stable supply chain leads to increased profitability and growth for all supply chain participants, spilling over the advantages to the industry at large.
Despite apparent advantages on paper, medium and large corporations resist entering supply chain programs due to the perceived risks. There are challenges associated with supply chain financing that must be mitigated to ensure it truly fulfils the promises it sets out to.
Here's a look at the risks associated with supply chain finance programs:
The financial health of Supply Chain partners
Supply Chain Finance as a structure relies on the creditworthiness of one party to lend advances to another. While there is no doubt about the need for SCF and its effectiveness, accurate assessment of creditworthiness and risk becomes challenging.
Stronger supply chain partners at the top of the chain might have robust financials and thorough paperwork that aids financiers in their due diligence processes. But these partners already have access to adequate liquidity and working capital and are not the key beneficiaries of supply chain financing programs.
The value of supply chain financing is realized when smaller players at the tail-end of supply chains receive access to timely working capital. These smaller partners may not have strong balance sheets or robust systems of accounting and finance. Weaker financial strength and incomplete disclosures carry a real risk of supply chain financing programs failing.
However, this risk can be mitigated using technology. By accessing alternative data points from verified sources and leveraging AI and ML backed algorithms, platforms such as Cashinvoice can support financiers with predictive insights to make sharper credit decisions. Thorough due diligence ensures that only creditworthy supply chain partners access financing, and there is no risk or obligation on the Corporate.
Probability of Fraud
Supply chain financing is an excellent tool for supply chain partners to unlock capital trapped within executed trade transactions. The invoice acts as the underlying instrument based on which financiers advance funds to the seller. The simplicity of the underlying instrument has also been the cause of woe for several financiers regarding supply chain financing.
Several frauds have transpired wherein invoices are tampered with, and banks end up advancing money against a trade that never occurred or funds it twice. If a financier's processes are manual, these frauds can recur for months before a red flag is raised.
One solution is to leverage technology to resolve this. Corporates, channel partners, and financiers can employ intuitive and easy-to-use cloud-based applications across the channel to conduct all steps in the financing process. An inclusive tech-enabled platform that directly picks up files and invoices from the buyer's ERP systems can ensure only authenticated invoices are sent to lenders for financing.
Additionally, automated processes, API-enabled authentication and validation, digital scorecards, and early warning signal systems could streamline processes and provide ease of onboarding while mitigating risk.
Transparency in reporting
Another risk in supply chain finance remains the ambiguity in reporting. Over the decades, supply chain finance has evolved to many structures to suit the varying nature of the underlying trade. While this has been beneficial in supporting channel partners, it has opened up questions about how much financing is reported as debt in the books of buyers and sellers.
Access to the Credit Bureau and government compliance APIs provides means to cross-verify and register the relevant information and ensure transparency in reporting, which removes the ambiguity to a large extent.
Supply chain financing remains untapped despite the benefits it offers to the entire ecosystem. It is time to take steps to mitigate the risks- both perceived and actual, to reap the benefits of such access to timely working capital.
We have path-breaking technological advancements that facilitate smooth processes and also offer analytics and predictive insights. The key is to leverage this wisely to implement an SCF program with adequate checks and balances. Technology creates a level playing field, and optimally employing tech will help mitigate the risks associated with SCF. Reach out to #TeamCashinvoice if you'd like to know more about building resilient and scalable supply chain finance programs.