What are the categories of supply chain finance solutions and techniques?

Supply Chain Finance Categories:-

SCF can be categorized into the following:

• Receivable purchase

• Loan/advance-based

• Enabling framework

Receivable purchase can be in the form of the following solutions:

• Receivable discounting

• Factoring

• Forfaiting

• Payables finance

Loan/ advance-based can be offered in one of the following solutions:

• Loan/advance against receivable

• Loan/advance against inventory

• Pre-shipment finance

• Distributor finance

Enabling Framework: this finance category is not a product or direct client’s solution, but here it can be referred to the BPO bank payment obligation, and here it should be noted that :

• BPO is an interbank instrument, not a product

• BPO prescribes that buyer and seller are not parties to the BPO itself, but are able to benefit from the BPO through separate agreements with their respective banks.

• It is a conditional undertaking designed to enable a bank to provide finance on a transactional basis, similar in principle to a letter of credit;

• Has a conditionality, unlike a letter of credit, is based on the matching of data rather than the presentation of conforming shipping documents; and

• Is subject to ongoing and development to enhance its vale to clients and banks.

Receivable purchase category:

In this solution, the seller of goods or services obtains finance by selling all or part of their receivables related to the goods or services to a finance provider, who then becomes the owner of the receivable.

 

Receivable purchase category can be offered either under recourse or non- recourse basis.

The finance provider should take the following points into consideration when contemplating

A provision of receivable purchase finance solution:

1. Validation that the receivable exists
2. Confirmation that the receivable is assignable in the seller's jurisdiction
3. confirmation that the receivable is enforceable against the debtor's jurisdiction 

Loan/advance-based :

Here in this finance solution, the seller of goods or services obtains finance by borrowing from the finance provider. And the loan or advance is made in the anticipation of being repaid from the proceeds of the sale of goods or services. 

The finance provider may be prepared to provide the loan or advance facility without taking an assignment of the title rights of the receivable, taking comfort from the knowledge that there is a good source of repayment. Alternatively, the financier may prefer to have a measure of control over the source of repayment, hence the financier may take an assignment of the receivable and take a security interests in the associated asset.

The stages of supply chain finance solutions can be discussed as the following:

• Purchase order stage: which represents the pre-shipment finance
• Invoice stage : which represents the post-shipment finance
• Inventory stage : can be either as a pre-shipment or post-shipment finance.

Purchase order-based finance:

This focuses on the finance that is used in the pre-shipment stage of the physical supply chain.

Purchase order based finance is more common in traditional trade finance, where the availability of the finance is initiated by a purchase order for the sales of goods by the borrowing company to their customers. In trade finance pre-shipment finance can be structured as either a loan or special undertaking like a letter of credit.

Purchase order-based finance is less common in open account context, due to the difficulty of controlling and securing the source of repayment. Therefore; purchase order based finance is relatively underdeveloped as as a supply chain finance solution.

Pre-shipment finance, particularly a purchase-order based finance is used to finance the sourcing and conversion of raw materials and components into finished goods for sale to the end- buyers.

Finance provider should take the following into consideration when contemplating a provision of purchase order-based finance:

• Performance risk ( the risk that the buyer is not obliged to pay)
• Credit risk ( the risk that the buyer is unable to pay, and consequently the client can't repay the advance out of its resources).
• The existence of an acceptable source of repayment
• The buyer credit quality and standing can be enhanced

Benefits of purchase-order based finance to sellers:

The seller is able to finance the sourcing and conversion of raw materials and components into finished goods for sale to their customers.

Benefits to buyers:

• Their suppliers can accept higher value orders from them;
• The need for making advance payment to their suppliers may be reduced or eliminated;
• The risk of non delivery by their supplier, having run out of money before shipment, may be reduced.

Benefit to sellers:

Sellers are able to finance the sourcing and conversion of raw materials into finished goods for on-sale to their customers.

Benefits to the finance provider:

The finance provider can benefit from the successful trading relationship between the parties and can have:

• Visibility : they know what the advance is to be made for and the eventual source or repayment.
• Control 
• Security : they might have a security interest in the inventory and the final receivable.

Typical client for a purchase order-based finance:

• Sellers who have confirmed purchase orders for the majority of their turnover
• Sellers who have short product conversion process ( if they are a manufacturer , or if they are a wholesale distributor effectively purchasing finished goods for their end-buyers
• Sellers who have buyers with enhanced and acceptable credit standing.

Purchase order-based finance is invaluable financing solution for sellers, who :

• Have a long cash conversion cycle, especially during the pre-shipment stage
• Receive large, on-off orders
• Have a growing order book, putting pressure on working capital, prior to the point of sale to their end-buyers.

Finance provider needs to take the following into consideration, when contemplating a provision of purchase order-based finance solution:

• Credit risk ( the risk that the buyer is not obliged to pay)
• Performance risk ( the risk that the buyer can't pay, and consequently the client can't repay the advance out of its own resources).
• The existence of an acceptable source of repayment.