Supply Chain Finance

Question 1

Supply chain finance

Answer 1

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

Question 2

SCF Characteristics

Answer 2

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

Question 3

Physical supply chain

Answer 3

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

Question 4

The financial supply chain

Answer 4

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

Question 5

Information supply chain

Answer 5

Represents the processes and organisation that are necessary to collect,transform and distribute information edficiently

Question 6

Purchase order

Answer 6

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

Question 7

Trade cycle analysis

Answer 7

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

Question 8

Quantitative detail

Answer 8

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

Question 9

Qualitative detail

Answer 9

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

Question 10

Days sales outstanding DSO

Answer 10

A metric used to measure a companys average sales payment terms

Question 11

Days purchasing outstanding DPO

Answer 11

A metric used to measure a companys average supplier payment terms

Question 12

Days inventory outstanding DIO

Answer 12

A metric used to measure a companys average rate of stock turnover

Question 13

Receivables purchase financing solutions

Answer 13

Receivables discounting

Forfaiting

Factoring

Payables finance

Question 14

Loan/advance based financing solutions

Answer 14

Loan/advance against receivables

Distributor finance

Loan/advance against inventory

Pre-shipment finance

Question 15

Receivables purchase category

Answer 15

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

Question 16

Loan/advance based category

Answer 16

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

Question 17

Purchase order based finance

Answer 17

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

Question 18

Inventory based finance

Answer 18

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

Question 19

Distributor finance

Answer 19

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

Question 20

Loan or advance against receivables

Answer 20

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

Question 21

Receivables purchase

Answer 21

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

Question 22

Factoring

Answer 22

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

Question 23

Forfaiting

Answer 23

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)

Question 24

Payables finance

Answer 24

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