Supply-chain finance is an area where treasury can contribute to the business by working closely with procurement and sales teams to achieve corporate-level objectives in sales-revenue growth, profitability and cash-flow generation. At a fall meeting of The NeuGroup’s Asia Treasurers’ Peer Group, members that had a supply-chain finance program in place discussed what they saw a trends and viewpoints.
Generally speaking, the world trade patterns are changing. That’s because middle class and consumerism are growing in emerging markets and there is there is rapid urbanization in China, India, Africa and the Mideast and North America. There is also increasing internationalization of large Asian corporates, and accompanying growth in emerging market small- and medium-sized enterprises (SMEs). All of these trends present new dynamics in the global supply chain.
That means that companies must think strategically about the broader scope of supply-chain finance. This approach can contribute tremendous value-add to one’s business unit, far beyond the short-term benefits of shortening DSO and extending DPO. Banks and corporates can work together to “push the envelope” to be innovative and resourceful in revamping the credit-assessment process in light of deeper understanding of the buyer-supplier business relationship. The anchor company – the MNC with strong financial and business position – is not a party to the financing agreement between the bank and borrower (supplier or buyer/distributor), but the anchor company may have a separate agreement with the bank about providing information to support credit assessments of the borrower done by the bank.
One question that came up during the meeting was whether SCF should expand to pre-shipment. Pre-shipment financing for strategic suppliers with small balance sheets and distributor financing for strategic customers with high working-capital requirements are business value-enhancing propositions for companies to pursue. However, this requires an active role from the anchor company to provide ongoing in-depth information to the financing bank about the buyer-supplier relationship.
Another takeaway: paying quicker, securitizing slower. In today’s competitive market landscape, providing “advance payments” to suppliers to secure raw materials and production capacity for future deliveries is becoming a more common practice. On the other hand, in Asia, there is slow pick-up of AR securitization programs. This is due to the fragmented regulations across the region, which impedes the perfection of “assignment of receivables.”
Supply-chain finance has multiple opportunities to explore in the broad spectrum of pre-shipment financing and buyer financing. Corporates should work closely with banks to encourage them to innovatively revamp credit assessment of emerging market small- and medium-size enterprises (SMEs), which indirectly supports the business growth of large MNCs.