Supply Chain Finance Flashcards
Supply chain finance
Defined as the use of financing the risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions
Refers to the application techniques in open account trade
SCF Characteristics
Portfolio of financing&risk mitigation techniques and practices that support the trade and financial flows along end to end business supply and distribution chains both domestic&international
Usually open account trade but not exclusively
Each intervention in the financial supply chain is driven by and event in the physical supply chain
Evolving and flexible
Physical supply chain
Represents the movement of raw materials, parts and goods associated with a finished product and involves the procurement, manufacturing/processing, distribution arrangements and lead times that end with the goods being in the hands of the end buyer
The financial supply chain
Used to describe the financial events that take place in parallel with the physical supply chain. Financial events commence as soon as a party in a supply chain takes an action that changes their financial position
Information supply chain
Represents the processes and organisation that are necessary to collect,transform and distribute information edficiently
Purchase order
In absence of a formal contract effectively perform the functions of a sales contract
Details of seller n buyer Description of goods or services Price and payment terms Delivery details and shipping terms A unique purchase order number
Trade cycle analysis
In depth analysis of the trade cycle of a company enables the finance provider to understand the needs of its clients in terms of risk mitigation,finance and payments
No matter which approach is appropriate, the intention is do add quantitative and qualitative detail to the high level view of the clients role in the physical supply chain
Quantitative detail
This provides clarity regarding funding gaps, risk exposures and payment flows.
Event timings Values Credit periods Lead times Transit times Shipment methods Suppliers Buyers Inspection Insurance
Qualitative detail
This provides a basis for risk assessment and includes
Reliability of any presale agreements
Nature, perishability and sale-ability of the goods
Price volatility of the goods
Track record of successful sourcing from suppliers
Track record of successful sale to buyers
History of dispute and dispute resolution
Days sales outstanding DSO
A metric used to measure a companys average sales payment terms
Days purchasing outstanding DPO
A metric used to measure a companys average supplier payment terms
Days inventory outstanding DIO
A metric used to measure a companys average rate of stock turnover
Receivables purchase financing solutions
Receivables discounting
Forfaiting
Factoring
Payables finance
Loan/advance based financing solutions
Loan/advance against receivables
Distributor finance
Loan/advance against inventory
Pre-shipment finance
Receivables purchase category
Seller of goods or services obtains finance by selling all or part of the receivable relating to those goods or services to the finance provider, who becomes the owner of the receivables
Loan/advance based category
Seller of goods or services obtains finance bu borrowing from the finance provider. It is made in the expectation that it will be repaid from proceeds of the sale of goods or services
Asset dosent transfer to the finance provider instead gets a security interest in the asset
Purchase order based finance
Is used to finance the sourcing and conversion of raw materials and components into finished goods for sale to buyers.
Finance provider checks Performance risk(the risk that the buyer is not obliged pay) Credit risk( the buyer dosent pay and as result client cannot repay the advance)
Usually based on the existence of a purchase order evidencing a contractually committed end buyer
Inventory based finance
Will usually be used to finance goods that are in a condition whereby they are ready for sale as finished goods or commodities
Asset based lending-maximum level of finance is available against calculated market value of goods
True sale-finance provider enters into a retention of title agreement for the goods being financed
Floor plan finance-a manufacturer places finished stock in the hands of a distributor or dealer with funding provided by the finance provider
Distributor finance
Provision of financing for a distributor of a large manufacturer to cover the holding of goods for re-sale and to bridge the liquidity gap until the receipt of funds from receivables following the sale of goods to a retailer or end customer
Addresses a particular need where there is a material timing gap between the date the distributor has to pay the manufacturer supplying them and the date the goods can be sold and resulting receivables converted to cash
Loan or advance against receivables
Financing made available on the expectation of repayment from funds generated from current or future trade receivables
Regards receivables as the source of repayment but will also retain recourse to the client if receivables are not sufficient to fully liquidate
Receivables purchase
Sellers of goods of services obtain financing by selling all or part of their receivables relating to those goods or services to the finance provider
Important for finance provider to check Receivables exist Can be clearly identified and validated Is assignable In enforceable against the debtor in the debtors jurisdiction
Factoring
Is a form of receivable purchase, flexibly applied, in which sellers of goods and services sell their receivables at a discount to a finance provider(known as the factor)
Factor then becomes responsible for managing the debtor portfolio and collecting the payment of the underlying receivables
Can be recourse or non recourse
Forfaiting
Form of receivables purchase, consisting of the without recourse purchase of future payment obligations represented by financial instruments or payment obligations
Providing funding against an acceptable instrument and payment obligation
Bill of exchange& Promissory note( bank may guarantee by adding aval/guarantee to the instrument
Deferred payment undertaking a L/C
Receivable (provided it is an acceptable instrument and payment obligation)
Payables finance
Provided through a buyer led program within which sellers in the buyers supply chain are able to access finance by means of a receivables purchase
An agreement between the buyer and the finance provider that includes an unconditional, irrevocable commitment to pay the finance provider on the invoice due date
The payables finance facility is agreed between the buyer and the finance provider
Aim is so that the payables finance program does not result in the reclassification of trade creditors as bank debt
