Background
Traditionally, financing the supply chain has been a tug of war between the buyer and the supplier with regards to payment terms. If the payment terms are increased, the buyer releases cash, but the supplier loses the same amount and vice versa. This battle over payment terms creates a lose-lose situation where the stronger part may feel that they are receiving “free” financing since they won the battle over payment terms. In reality, the losing side of this tug of war needs to adjust prices to compensate for the cost of financing the supply chain. The traditional supply chain is sub-optimal from a financing perspective, and both sides pay an unnecessary price for this.
With Supply Chain Financing, we are turning a traditional lose-lose battle into a win-win situation where both parties benefit from the optimization of how the supply chain is financed. Supply Chain Financing builds on the arbitrage that exists between the cost of capital for a buyer and a supplier and that of a financier. Neither the buyer nor the supplier has financing as a core business, and therefore the financing of the supply chain is sub-optimal when one of them is providing it. The financier, on the other hand, is able to provide financing at a lower cost than both the supplier and the buyer and still generate a healthy return for its owners. With Supply Chain Financing both the supplier and the buyer are able to free up capital.
Outline of the setup
This is how the setup works: The supplier sends an invoice to the buyer. The buyer approves the invoice and uploads it to the SCF Platform and thereby creates an irrevocable payment obligation. This automatic integration of invoice approval separates SCF from traditional receivables financing driven from the supplier’s sales ledger, as it eliminates the risk of late payments and deductions, and transforms the risk on the invoice to a pure credit risk on the buyer. The supplier is now able to sell the invoice to the financier at an attractive rate based on the buyer risk. The transaction is designed to be a “true sale” where the risk is transferred from the supplier to the financier. For example, in a supply chain with 75-day terms, it may be possible for the supplier to receive payment on day 5 at a low SCF cost, while the buyer can pay the financier on day 75. Given the large benefits to the supplier and the low cost of financing, a potential terms extension of e.g. 15-30 days is fully compensated by the SCF setup and therefore helps the buyer motivate extended terms. When used together with a terms extension, the SCF setup is a true win-win situation!
The structure of the setup is illustrated below.
What benefits does the program bring to participating suppliers?
With the Supply Chain Financing setup, the suppliers will get:
For more information, please contact Peter Stenbrink at Peter.Stenbrink@Capto.se or +46-8-4585368
Traditionally, financing the supply chain has been a tug of war between the buyer and the supplier with regards to payment terms. If the payment terms are increased, the buyer releases cash, but the supplier loses the same amount and vice versa. This battle over payment terms creates a lose-lose situation where the stronger part may feel that they are receiving “free” financing since they won the battle over payment terms. In reality, the losing side of this tug of war needs to adjust prices to compensate for the cost of financing the supply chain. The traditional supply chain is sub-optimal from a financing perspective, and both sides pay an unnecessary price for this.
With Supply Chain Financing, we are turning a traditional lose-lose battle into a win-win situation where both parties benefit from the optimization of how the supply chain is financed. Supply Chain Financing builds on the arbitrage that exists between the cost of capital for a buyer and a supplier and that of a financier. Neither the buyer nor the supplier has financing as a core business, and therefore the financing of the supply chain is sub-optimal when one of them is providing it. The financier, on the other hand, is able to provide financing at a lower cost than both the supplier and the buyer and still generate a healthy return for its owners. With Supply Chain Financing both the supplier and the buyer are able to free up capital.
Outline of the setup
This is how the setup works: The supplier sends an invoice to the buyer. The buyer approves the invoice and uploads it to the SCF Platform and thereby creates an irrevocable payment obligation. This automatic integration of invoice approval separates SCF from traditional receivables financing driven from the supplier’s sales ledger, as it eliminates the risk of late payments and deductions, and transforms the risk on the invoice to a pure credit risk on the buyer. The supplier is now able to sell the invoice to the financier at an attractive rate based on the buyer risk. The transaction is designed to be a “true sale” where the risk is transferred from the supplier to the financier. For example, in a supply chain with 75-day terms, it may be possible for the supplier to receive payment on day 5 at a low SCF cost, while the buyer can pay the financier on day 75. Given the large benefits to the supplier and the low cost of financing, a potential terms extension of e.g. 15-30 days is fully compensated by the SCF setup and therefore helps the buyer motivate extended terms. When used together with a terms extension, the SCF setup is a true win-win situation!
The structure of the setup is illustrated below.
What benefits does the program bring to participating suppliers?
With the Supply Chain Financing setup, the suppliers will get:
- Improved operating cash flow through reduction of Accounts Receivable
- A transaction designed to be a true sale
- Strengthened key ratios
- More predictable payment flows, and flexibility to control cash flow if desired
- Diversified funding at a very competitive rate
For more information, please contact Peter Stenbrink at Peter.Stenbrink@Capto.se or +46-8-4585368