What is a Supply Chain?
A supply chain refers to a network or system of organizations, resources and activities comprising buyers, sellers, and end-users involved in producing, selling, consuming and providing goods and services.
A supply chain network can be as simple as involving just a buyer and seller or as complex to involve a supplier(s), manufacturer, distributor, wholesaler, retailer and final consumer in a single transaction.
Supply Chain Finance, therefore, refers to financial systems, methods or services through which parties involved in the supply chain network can receive much-needed finance to enhance working capital and sustain the flow of goods/services and payments.
Supply Chain Finance is not a new finance mechanism but interest in it has continued to grow as organizations seek cheaper and easier means of funding their business activities.
Supply Chain Finance is beneficial to the major parties involved because it provides quick access to payment for the sellers, deferred payment options to buyers and low-risk / short-tenured means of income for financial institutions.
Every supply chain involves a flow of goods and payments. It could be a case of a supplier making goods available to the buyer and subsequently receiving payment or a manufacturer releasing products to a distributor for subsequent or immediate payment.
According to an ICC publication titled Supply Chain Finance: An Introductory Guide, “Any company’s commercial activities can be split into two categories: the physical supply chain, and the financial supply chain”
Also according to the ICC publication, “Each financial intervention (financing, risk mitigation or payment) in the supply chain is driven by an event or ‘trigger’ in the physical supply chain. Some examples of these events are:
Invoices raised by the seller
Goods accepted by the buyer / entered the buyer’s warehouse”
A trigger could therefore be the submission of an “accepted-for-payment invoice” by the supplier/ buyer to the financial institution. This action will prompt the financial institution to “finance” the supply chain based on the agreed terms or product on offer.
Supply Chain Finance From a Global Perspective
Following the global financial meltdown in 2007/2008, lenders were reluctant to avail credit facilities to businesses around the world, especially in North America and Europe where the effects were greatly felt. The crash in real-estate value meant credit facilities had to be secured by other means apart from the common use of legal mortgages as collateral.
According to a study by Mckinsey & Company in 2015 “Although the SCF (Supply Chain Finance) market has been around since the early 1990s, it did not take off until after the economic crisis. Several economic, technological and regulatory forces have spurred its growth….. The scarcity and cost of capital in the wake of the credit crunch created an incentive to explore SCF programs as the spread between investment-grade and noninvestment-grade rates widened”.
Supply Chain Finance, therefore, became attractive because lenders were financing against trade receivables from reputable organizations without the need for long-term loans or huge collateral requirements.
Also according to the Mckinsey report, “SCF is a big business, with $2 trillion in financeable highly secure payables globally and a potential revenue pool of $20 billion. Revenue has grown at 20 per cent per year since 2010 and is expected to continue growing at around 15 per cent for the next three to five years. “
The growth in Supply Chain Finance has been boosted by technological advances and the growth of Fintechs. The majority of supply chain finance solutions are offered on robust technological platforms which make use of enhanced digital interfaces, algorithms, blockchain technology and API integration with the ERP systems of buyers and suppliers. These features help to reduce overall turnaround time and ease the onboarding process.
Further evidence of the growth of Supply Chain Finance around the world can be seen in different government interventions and regulations in the United Kingdom between 2012 and 2019 which included the establishment of a supply chain finance scheme in 2012 and the Prompt Payment Code in 2019 which compelled large corporations to disclose their supplier payment practices. According to Global Trade Review, “Research by YouGov and Crossflow Payments estimates that a staggering £266bn is trapped in late payments in the UK alone.”
These interventions by the UK authorities have resulted in large UK corporations establishing supply chain finance platforms in conjunction with financial lenders to enable their suppliers to receive early funding on pending invoices. Some of such companies which agreed to begin implementation of supply chain platforms in 2012 were Diageo, Boeing, Jaguar Land Rover, Statoil and Siemens1.
A report by PwC titled SCF Barometer 2018/2019 provides an insight into SCF participants according to sector and region as seen in the table below. The manufacturing and Consumer Goods sectors have the highest levels of adoption of SCF. This trend can be said to be similar to the level of participation in SCF by sectors in Nigeria;
With the growing popularity and acceptance of supply chain finance amongst large corporates, suppliers and contractors, financiers and key players have realized the need to make the products easily accessible. This has resulted in the emergence of many online supply chain finance platforms which aim at providing prompt SCF solutions to interested parties on a single platform.
Supply Chain Finance in Nigeria
Supply Chain Finance has been available as a means of financing in Nigeria in some form or the other. While supply chain finance is now being embraced on a larger scale as a full bouquet of products, financial institutions have offered services such as invoice discounting and purchase order finance over the years.
The need for short-term working capital and funding secured by guaranteed receivables has become more attractive as a result of the shift from traditional means of securing financing which usually require stringent forms of collateral.
The emergence and rapid growth of Fintechs in Nigeria have shown that banking services can be conducted in simpler ways and that commercial banks are not the only players in the financial services sector. Fintechs have leveraged technology which avails customers of normal banking services in easier, more convenient ways.
Based on the level of involvement in supply chain finance, the manufacturing (FMCG) and oil/gas industries come out on top because of the large volume and diverse range of their output/products, penetration and wide usage of their products. Organizations involved in these industries rely on vendors, suppliers and distributors for the outward flow of goods and inward flow of payments. Parties involved in a supply chain now embrace the importance of short-term and off-balance-sheet lending which supply chain finance provides.
Exin Versa: Nigeria’s digital supply chain finance platform