Benefits of Supply Chain Finance for Suppliers
Needs and Challenges of Suppliers
Supply chain financing presents obvious benefits for buyers, but what about the supplier perspective? To understand the benefits, we need to look closer at the challenges suppliers face.
On a day-to-day basis, suppliers need to meet the cash demands of recurring expenses to fund their operations. However, they face a consistent gap between supplying products and materials and getting paid. In the current economic climate, suppliers are faced with increases in operating costs and pressure for fast profits, which make meeting capital needs while maintaining cost-effective and lean operations more challenging. That doesn’t include the capital needs of seeding new business opportunities, nor the cost of purchasing equipment and inventory. These are just as important as a solid customer base. Add to these the cost of staff and the price of facility maintenance, renovation, and repair and it is easy to see that suppliers need to ensure they have a solid cash-flow plan.
To meet these complex and exhaustive financial needs, suppliers turn to resources that include internal cash reserves, which can put a noticeable strain on resources. They may even look to specialty lenders that serve their niche or industry. Many utilize financial assistance from banks, such as commercial loans, equipment financing, and lines of credit. Regardless of the form of bank financing, according to the Council of Economic Advisors, in the years since the economic downturn, banks have become more risk-averse. When it comes to accessing much-needed financing, many SMEs compete at a considerable disadvantage.
And yet, securing needed cash remains the most important factor for suppliers. Liquid resources, predictable cash flow and the total cost of working capital are crucial. Traditional funding options can be inflexible when it comes to meeting needs in today’s economy.
How Does Supply-Chain Financing Benefit Suppliers?
As we discussed above, suppliers have unique and constant needs. Efficiency, profitability, and a continuous supply of working capital are essential to a supplier’s long-term success. In what ways does supply chain finance meet these needs?
A successful supply chain financing program depends largely on the buy-in from suppliers. Of all the potential setbacks PWC identified was “lack of supplier appetite” as the top issue. Therefore, educating suppliers and providing a deeper understanding of the advantages is crucial to a program’s success.
There’s no successful supply chain financing system without the onboarding of willing suppliers. This means that buyers have to become effective sellers; they must know how to convey the benefits of participating in an SCF program.
Fortunately for buyers, selling an SCF program is simple. It’s the onboarding that requires greater attention. Onboarding should be fast and easy. PWC states that 32 percent of supply chain financing programs take over six months to implement. Furthermore, the program should be available to suppliers of all sizes. With faster payments, suppliers receive vital funds with a minimal reduction in total income. With the rapid availability of cash, suppliers can look toward expansion or larger orders, and meeting other business objectives while becoming more competitive.
With supply chain financing, suppliers take advantage of the relationships already in place to remain competitive. SCF complements a supplier’s strategy, allowing all parties access to cost-effective working capital.
Conversely, other solutions can be limiting. P-cards, dynamic discounting, and bank financing can have significant drawbacks for suppliers. This has increased the need for an integrated solution from a funding partner with access to immediate capital. As an integrated solution, the platform must be cloud-based; there must also be guidance from an experienced business advisor throughout the process.
With a technology-based supply chain financing platform, immediate visibility into the status of an order has reduced the time between shipment and payment, an efficiency most organizations seek. However, a technology platform must meet certain requirements in order to benefit suppliers; not all platforms offer users functionality that can drastically increase efficiency in the procurement and accounts receivable departments. Above all, a portal needs to be reliable and secure. A platform should also retrieve invoicing data without affecting existing ERP functionality and should require limited IT involvement at the onset. From the beginning, the program must be designed to enable rapid access to supplier early payment without cumbersome documentation requirements.
In terms of accessibility to suppliers, there should also be no cost to access the platform, or requirements that could potentially limit a supplier’s ability to receive other forms of financing, such as lien requirements. Not only would this decrease a supplier’s appetite to migrate to the platform as part of accounts payable process improvement programs initiated by a buyer, but also negatively impact the willingness of a supplier to participate in supply chain financing. If adopting the platform is difficult, an integrated solution for supply chain financing might not be as successful as it otherwise could be.
In the end, supply chain financing creates stronger relationships between buyers and suppliers, establishing better business processes and cementing business that will be mutually beneficial.