Reduced cost of capital for suppliers can not only play a vital role in costreduction of profitability, but also influence margins and profitability and benefit buyers as a result of loweredcost of goods sold (COGS) to them. Supply chain finance plays a crucial role in an organization’s profitability.A holistic approach to the physical and financial flows of the supply chain can lead to a win-win position for buyers, suppliers, and banks by exploiting the opportunities ingrained in their relationships.
The basic idea of supply chain finance is to provide profitable financing facilities to suppliers on the strength of buyers’ business as security for lenders. The main benefit to suppliers is access to quicker cash flow at preferential interest rates.
How a holistic approach benefits all stakeholders
The unifying network platform of the holistic approach connecting all thestakeholders ensures lower interest rates due to the following reasons:
- Visibility of milestone:Lenders can know when the PO is issued, the status of raw materials ordered, production milestones, order shipped, invoice approved, etc. This visibility makes it easier for lenders to tie paymentswith milestones.
- Visibility of past performance: A lender can view a supplier’s past performance, which is critical for pre-shipment financing. Supplierswith a good track record can thereby bargain and obtain much lower interest rates, since past performance data ensures lenders low risk.
- Automated payment: This lowers risk for lenders as the buyer paysas per mutually agreed terms, and the money is automatically transferred on the due date, irrespective of commercial disputes between the buyer and the seller. The lender no longer relies on the supplier to get back his loan money.
- Greater access to the marketplace of lending: The supplier gets access to an international marketplace of lending institutions and thereby derives the benefitsof competitive rates across the globe.
- Electronic,accurate and timely data: Electronic data eliminates errors and updates the status much closer to real-time, eliminating the cost and delay of sending physical documents across the world via courier.
Early payment discount programs
The unifying network platform of the holistic approach enables suppliers to receive quicker payments and buyers to receive discounts for those early payments.
Buyers with available cash can fund the program themselves. Financial institutions can also fund these programs. Suppliers can opt in to be automatically paid early at a discounted rate. These can include dynamic discounting, where the discount rate depends on how early the payment is made.
Early payment is a win-win for both parties. Moreover,in an automated electronic platform, the procure-to-pay process is streamlined, and payment approvals are made more quickly.
Suppliers’ low borrowing can directly translate into lower prices for the buyer. Of course, how much the cost of goods will go down depends on factors such as the competitive landscape, type of commodity, the nature ofa relationship between buyer and seller, and more. In any case, it reduces the cost of the supply chain, which can be utilized to lower the buyer’s COGS.
Brief points to summarize
- The supplier gets finance at a preferential interest rate based on the strength of the buyer’s business.
- The buyer can negotiate price discounts or longer payment terms with its suppliers.
- Easy availability of working capital ensures a healthier, financially strong supply chain, leading to greater reliability and certainty of supply.
- Fruitful, long-term buyer-supplier relationships
- Cash flow control, which paves the way to future growth