Supply chain finance has takenoff in recent years, fueled by companies' greater focus on workingcapital management, as well as banks' retreat from lending in thewake of the financial crisis.

“Almost every business is becoming increasingly global and thatstretches their supply chain out a lot,” noted Craig Jeffery,managing partner at Atlanta-based consultancy StrategicTreasurer.

Finance teams try to improve their working capital metrics bywaiting longer to pay suppliers. But “when a larger player istrying to free up money by extending terms, that creates extremehardship for suppliers,” Jeffery said.

Supply chain finance can cut through that dilemma. Companies canoffer financing to their suppliers based on outstandingreceivables, which lets a the company to extend its days payablesoutstanding and improve its working capital without makingsuppliers wait longer to be paid.

“The capital play is massive for treasury people,” Jeffery said.“The ability to improve your capital position is great, and you cando that without breaking your suppliers.”

The term supply chain finance covers different approaches toextending credit, such as reverse factoring, in which a companyarranges financing based on invoices from suppliers that it hasapproved for payment, or dynamic discounting, in which the companyoffers to pay the supplier early at a discounted rate. Jefferyestimated that about 20% of companies currently use some form ofsupply chain finance.

Strategic Treasurer recently published a report on supply chain finance that notes the rapid growth insupply chain finance but cites a “lack of awareness” amongcorporate finance departments. In a recent interview, Jeffery andIsaac Zaubi, publications manager at Strategic Treasurer, discussedsome of the points that finance practitioners should consider ifthey're planning to implement a supply chain finance program.

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Choosing a Provider

Companies selecting a supply chain finance provider should lookat three aspects: access to capital, the size of the vendor'snetwork and the capabilities of the vendor's system.

For starters, does the company want to use its own cash to fundthe supply chain finance program or does it plan to rely on a thirdparty for the cash?

“Supply chain finance providers out there today offer a range ofmodels,” Zaubi said. “Depending on their funding needs, companiescan choose a solution.”

Most fintech solutions have multiple banks that provide funding,he said. If companies want to use their own cash, “they couldleverage a dynamic discounting program where they're able to fundalmost the entirety on their own.”

Companies should also check what businesses already use eachsupply chain finance platform, to see which of their counterpartiesare on the network.

“That's a key component in how the onboarding works,” Jefferysaid. “If you give them your vendor list or customer list, theywill run a match to show which ones are already on there.”

Joining a supply chain finance platform that already includes anumber of the company's vendors expedites getting started. “Themore customers or vendors you get on the network, the easier it isto manage the entire process, and get the most financial value outof it as well,” Jeffery said.

Companies should also look at the capabilitiesof the platform itself. “How easy is it for a vendor to self-serve,update payment information, communicate about payments?” Jefferysaid. “Process efficiencies have often been overlooked becausepeople went to supply chain financing for the financing part of it.But the efficiencies that are being built in are generating somepretty significant yield.”

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Banks vs. Fintech

While banks dominate the supply chain finance market, StrategicTreasurer's report notes the growing role of fintech platforms. Itcites a McKinsey report estimating that as of 2015, banks had about85% of the global supply chain finance market, while fintech firmshad 15%. In contrast, in 2005, banks had 95% of the market andfintech just 5%.

“Banks are leading in terms of access to capital,” Jeffery said,but noted competitive pressure from fintech firms.

“Fintechs have been driving the efficiency, the networks, andrepresent a bit more of an open model,” he said. “They can tap intomultiple credit providers. They're more nimble and flexible.”

Zaubi said fintech providers of supply chain finance may alsoallow more of a company's suppliers to participate.

“Using a fintech solution, most companies are finding they'reable to onboard as many suppliers as they want,” he said. “Withbanks, programs are only available to a certain number ofsuppliers, those deemed least risky and most profitable.”

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Internal Cooperation

A supply chain finance program involves a number of differentunits of a company, including not only finance and treasury, butprocurement, sales and accounts payable. Procurement's prioritiesmay differ from treasury's, but Jeffery stressed the need for allthe different departments to work together to make the supply chainfinance effort successful.

Strategic Treasurer's report suggests that companies form aworking capital council that includes representatives from AP,procurement, IT, sales, treasury and the legal team. A surveyconducted by Strategic Treasurer found that 17% of companies have aworking capital council and another 8% plan to implement one by2019.

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Global Rules and Regulations

Companies that work with suppliers in many parts of the worldwill have to contend with various countries' different rules andregulations.

“If they have a lot of suppliers that are distributed across theworld, there are a lot of different regulatory challenges that comeinto play,” Zaubi said. “Onboarding a supplier in China is going tolook a lot different than onboarding a supplier in LatinAmerica.”

Companies should rely on their own legal departments as well asthe regulatory team at their supply chain provider, he said. “Theycan provide guidance and insight as to the most appropriate methodmoving forward to get the documentation. That's one of the biggestaspects when implementing a global supply chain.”