Topic 11 Supply Chain Finance

TOPIC 11
Supply chain finance
Introduction
In this topic, we discuss supply chain finance in the context of the
Standard definitions for techniques of supply chain finance, published in
2016 by the Global Supply Chain Finance Forum (GSCFF). In the sections
that follow, we will refer to these as the standard definitions. When
drafting the standard definitions, members of the forum took a broad,
holistic view of supply chain finance that included well‑established
solutions as well as much newer, technology‑enabled techniques. We
will also explore the distinction between physical and financial supply
chains and the financial consequences to business. Each solution/
technique and its application will also be clearly explained. Finally, we
will touch on alternative finance and innovation in supply chain finance.
LEARNING OBJECTIVES
By the end of this topic, you will understand:
terminology related to supply chain finance;
business drivers that create a demand for working capital finance;
the relationship between the physical and the financial supply chain;
different techniques of supply chain finance and how they operate;

and
innovative approaches, new entrants and the positive impact of

technology.
© The London Institute of Banking & Finance 2019

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THINK . . .
Consider businesses your bank or financial technology

firm supports. Think about the different steps in their
manufacturing and distribution processes. How much cash
do these businesses have to pay out prior to customers
paying for their goods?
11.1 What is supply chain finance?

Representatives from many global trade finance and receivables finance
organisations were involved in drafting the standard definitions. Their
brief was to come up with a high‑level definition of supply chain finance
and its important associated characteristics.
STANDARD DEFINITIONS FOR TECHNIQUES IN

SUPPLY CHAIN FINANCE
“Supply chain finance (SCF) is defined as the use of

financing and risk mitigation practices and techniques
to optimise the management of the working capital
and liquidity invested in supply chain processes and
transactions. SCF is typically applied to open account
trade and is triggered by supply chain events. Visibility
of underlying trade flows by the finance provider(s) is
a necessary component of such financing arrangements
which can be enabled by a technology platform.”
(GSCFF, 2016)
This definition refers to the application of supply chain finance

techniques to open account trade. The term open account is generally
understood to mean that:
shipping documents are not controlled through the banking system

but are sent direct by the exporter to the importer;

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SUPPLY CHAIN FINANCE CITF
the importer’s bank does not make a conditional undertaking to pay

upon fulfilment of specified conditions on behalf of the importer;
and
the importer settles with the exporter directly by making a clean

payment after an agreed deferred credit period.
According to the ICC Banking Commission publication Rethinking Trade

& Finance, it is estimated that up to 90 per cent of trade transactions are
settled on open account terms (ICC Banking Commission, 2017).
FACTFIND
Standard definitions for techniques in supply chain

finance
Explore the GSCFF website at: http://supplychain

financeforum.org/ [Accessed: 20 October 2018].
The standard definitions are available online and

also to download from the GSCFF website: http://
supplychainfinanceforum.org/ICC-Standard-
Definitions-for-Techniques-of-Supply-Chain-Finance-
Global-SCF-Forum-2016.pdf [Accessed: 20 October
2018].
Another useful resource is the ICC Banking

Commission report Rethinking Trade & Finance,
available at: https://cdn.iccwbo.org/content/uploads/
sites/3/2017/06/2017-rethinking-trade-finance.pdf
[Accessed: 20 October 2018].
11.1.1 The key characteristics of supply chain finance

The GSCFF has determined that financing options with the following
characteristics fall under the umbrella of its definition of supply chain
finance.

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Portfolio of risk mitigation techniques and practices

Supply chain finance “is a portfolio of financing and risk mitigation
techniques and practices that support the trade and financial flows
along end‑to‑end business supply and distribution chains, domestically
as well as internationally. This is emphatically a ‘holistic’ concept that
includes a broad range of established and evolving techniques for the
provision of finance and the management of risk.
Open account
[SCF] is usually, but not exclusively, applied to open account trade. Open
account trade refers to trade transactions between a seller and a buyer
where transactions are not supported by any banking or documentary
trade instrument issued on behalf of the buyer or seller. The buyer
is directly responsible for meeting the payment obligation in relation
to the underlying transaction. Where trading parties supply and buy
goods and services on the basis of open account terms, an invoice is
usually raised and the buyer pays within an agreed timeframe. Open
account terms can be contrasted with trading on the basis of cash in
advance, or trading utilising instruments such as documentary credits,
as a means of securing payment.
Parties
Parties to [SCF] transactions consist of buyers and sellers, which are
trading and collaborating with each other along the supply chain. As
required, these parties work with finance providers to raise finance
using various SCF techniques and other forms of finance. The parties,
and especially ‘anchor’ parties on account of their commercial and
financial strength, often have objectives to improve supply chain
stability, liquidity, financial performance, risk management, and
balance‑sheet efficiency.
Event driven
Finance providers offer their services in the context of the financial
requirements triggered by purchase orders, invoices, receivables, other
claims, and related pre‑shipment and post‑shipment processes along
the supply chain. Consequently, SCF is largely ‘event driven’. Each
intervention (finance, risk mitigation or payment) in the financial supply

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chain is driven by an event or ‘trigger’ in the physical supply chain.

The development of advanced technologies and procedures to track
and control events in the physical supply chain creates opportunities
to automate the initiation of SCF interventions in the related financial
supply chain.
Evolving and flexible

SCF is not a static concept but is an evolving set of practices using
or combining a variety of techniques; some of these are mature and
others are new or ‘leading edge’ techniques or variants of established
techniques, and may also include the use of traditional trade finance.
The techniques are often used in combination with each other and with
other financial and physical supply chain services.”
(GSCFF, 2016)
11.1.2 Differences between trade finance and supply chain

finance
The term ‘supply chain finance’, unlike trade finance, is relatively
new and was adopted by many finance providers as a description of
a single, very narrow, payables finance product, while others used the
term to refer to a much wider family of solutions, often incorporating
receivables, payables and inventory.
The term ‘trade finance’, by contrast, has been in common usage for
centuries. It is generally accepted to refer to the intermediation by
banks through the control of documents relating to the shipment of the
underlying goods.
The distinction between trade and supply chain finance is becoming

blurred as technological developments and digitisation increase
the scale of data‑driven solutions for risk mitigation and finance.
Nevertheless, Table 11.1 illustrates the key characteristics that tend
to result in certain solutions being labelled ‘trade finance’ and others
‘supply chain finance’.

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TABLE 11.1 CHARACTERISTICS OF TRADE FINANCE AND SUPPLY

CHAIN FINANCE
Characteristic Trade finance Supply chain finance
Level of bank More likely to be high. More likely to be low.

intermediation
(risk mitigation, Trade finance solutions Supply chain finance was
finance and incorporate all three developed in the open
payment) elements through control of account space, where bank
shipping documents. intermediation was limited
to making the payment.
Transactional More likely to be high. More likely to be low.

security (title to
goods, control Trade finance solutions have Due to the relative lack of
of goods and the potential to incorporate intermediation, the potential
security interest all three elements through to exercise transactional
in receivable) control of shipping control is more limited,
documents and associated though a security interest
security documentation. in the receivable is usually
achievable.
Basis of finance More likely to be More likely to be flow‑based.

availability transactional.
The greater efficiency
In order to benefit from and lower handling costs
transactional security, high associated with flow‑based
levels of transactional control financing are among the
are required. This is more reasons for the trend away
likely to be achievable when from traditional trade
finance is made available on finance.
a transactional basis.
Pre‑ and More likely to be high. More likely to be restricted

post‑shipment to post‑shipment.
finance Trade finance instruments
and structures facilitate Supply chain finance
finance across the solutions tend to be based
end‑to‑end trade cycle, from on invoices.
purchase order to payment.

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11.2 Understanding supply chains

To understand how supply chains are financed it is important that you
first learn about the operation of the physical supply chain and can
identify the roles played by the main parties involved.
A supply chain involves multiple entities who will interact and play
their role in the sourcing, manufacturing, production and distribution
of goods. It is likely that most parties will be both a buyer and a seller
and each will have an interdependency on the other.
Supply chains, whether simple or complex, work on the basis of

collaboration between the different entities in the chain. Their
importance in the supply chain will be governed by where they are
placed in the chain and the level of contribution they are expected to
make for the chain to work. Some may be major corporations, while
others may be small and medium‑sized enterprises (SMEs). Each will
have their own needs and requirements that have to be considered if
the supply chain is going to work effectively.
11.2.1 The physical supply chain

The physical supply chain represents the movement of raw materials,
parts and goods associated with a finished product and involves the
procurement, manufacture/processing, distribution arrangements and
lead times that end with the goods being in the hands of the end buyer.
A physical supply chain usually involves at least three links in the chain,
with the primary parties always being the buyer and seller who combine
to produce the end product. Why three links instead of two? The reason
is that the seller has to source raw materials, components or finished
goods that they then sell to the buyer. In practice, supply chains extend
to multiple parties, as illustrated Figure 11.1 and Table 11.2.

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FIGURE 11.1 PRIMARY PARTIES
Source: Bugeja and Taylor (2018)
TABLE 11.2 PARTIES AND ROLES
Party Supply chain role
Seller Raw material producer Extraction
Buyer and seller Manufacturer Manufacture
Inventory (raw material,

work‑in‑progress and finished
goods)
Buyer and seller Wholesale distributor Distribution
Inventory (bulk finished goods)
Buyer and seller Retailer Retail inventory (unit‑level

finished goods)
Buyer Consumer Consumption
This figure and table illustrate a relatively simple physical supply chain
with relatively few ‘links’ and a linear process. In practice, supply chains
tend to be more complex. Whereas, in the past, supply chains were based
around a local or regional network of suppliers, the trend over many
years, driven by reduced trade barriers and a greater inclination to trade

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internationally, has been to gain efficiencies through globalisation.

That said, in recent years we have seen a move towards nearshoring
and onshoring, where possible, as a result of technology developments
reducing the advantage of low‑labour cost economies relative to shorter
transit times and lower freight costs. You learned about nearshoring in
section 1.1.3.
11.2.2 The financial supply chain

The term ‘financial supply chain’ is used to describe the financial
events that take place in parallel with the physical supply chain. The
financial events commence as soon as a party in a supply chain takes an
action that changes their financial position. For example, when a seller
contractually commits to deliver their goods to a buyer, their financial
position has changed because they are now required to source goods,
undertake production, maintain inventory, undertake shipment and
account for the resulting receivable.
Each event has financial consequences: sourcing has to be paid for,

production costs are incurred and inventory has to be funded. The
changes in financial position are not just related to liquidity and working
capital, but also to risk exposure. Once a party is contractually committed
to do something, they are potentially liable for failing to do it.
CHECK YOUR UNDERSTANDING 1
What is the difference between a financial and physical

3 supply chain?
11.2.3 The information supply chain

The information supply chain represents the processes and organisation
that are necessary to collect, transform and distribute information
efficiently.
As noted previously, there are many stakeholders in the physical supply

chain. Each stakeholder has a role to play and each action is an ‘event’
that generates information. Each event impacts on the seller and/or the

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buyer to some degree and the information relating to the event can also
be relevant to the finance provider.
For example, when a carrier accepts goods for shipment and loads them
onto the vessel, we can see that there is an event and there is also the
related information:
the loading on board is the ‘event’; and
the document (providing details of the shipment) to the seller

confirming that the goods have been loaded on board the vessel is
the ‘information’.
Using another example, when an inspection agency undertakes

pre‑shipment inspection of the seller’s goods on behalf of the buyer,
there is once again an event and there is also the related information:
the execution of the inspection itself is the ‘event’; and
the inspection report is the ‘information’.
11.2.4 The relationship between the physical and financial

supply chain
As you learned in section 11.2.1, the physical supply chain reflects
the physical production, movement and storage of raw materials,
components and finished goods while the financial supply chain
reflects the financial events that support it. The events in both the
physical and the financial supply chain have financial implications and
consequences in terms of risk, working capital and cash flows.
The main elements that dictate the relationship between the physical
and financial supply chain are derived from the sales contract/purchase
order terms agreed by the primary parties in the supply chain, namely
the buyers and sellers.
Sales contract
When sellers and buyers have agreed to trade, the terms will often be
encapsulated in a sales contract. This is a legal agreement for the sale
of goods or services by the seller and the purchase of the goods or
services by the buyer. A sales contract can cover a single consignment

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or a number of consignments over a period of time, in which case it

is common for each consignment to be the subject of an individual
purchase order.
In some cases, sellers and buyers do not sign a formal contract but
operate on the basis of a quotation by the seller (often known as a
‘pro forma invoice’) and an acceptance by the buyer in the form of a
purchase order.
Purchase order
A purchase order may be issued in respect of individual consignments
under a sales contract or may, effectively, perform the function of a
sales contract on its own. In the absence of a formal sales contract,
the terms that would normally appear in the sales contract will be
incorporated into the purchase order, albeit in abbreviated form. As a
minimum, a purchase order will include:
details of seller and buyer;
description of goods or services;
price and payment terms;
delivery details and shipping terms; and
a unique purchase order number.
The purchase order is generally regarded as the first event in the financial
supply chain and, as such, is an important document. The purchase
order number is a unique reference that enables the reconciliation of
invoices and other shipping data with the purchase order. As we look at
the digitisation of the financial supply chain, you will see why the ability
to match shipment data with purchase order data is a fundamental
enabler for many supply chain finance solutions.
Commerical invoice
You learned about the commercial invoice in section 6.5. The invoice
is also an important legal document. It is a commercial document
raised by the seller and addressed to the buyer which describes the
goods or services that have been delivered or despatched to the buyer

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and specifies the amount due by the buyer to the seller in payment.
When the invoice is issued, this is reflected in the seller’s accounts as
a receivable (ie a debtor in their balance sheet). At the same time, the
goods that have been sold to the buyer are removed from the seller’s
balance sheet. Once the invoice is approved by the buyer, a payable is
created in their accounts (ie a current liability) and the goods are added
to their balance sheet (ie a current asset is created). At this point, the
buyer has an obligation to pay the seller on the due date.
Impact on liquidity and working capital

We will now look at how contracted terms of payment coupled with the
practical realities of the physical supply chain have a material effect on
a company’s liquidity and working capital.
For example, let us take a scenario where a buyer has agreed to pay
30 per cent of the invoice value with the order (ie pre‑shipment) and
the remaining 70 per cent immediately upon shipment. The financial
implications for the buyer will depend on a number of factors driven by
the physical supply chain. These are the:
pre‑shipment lead time (ie the time between the order being placed
and the goods being shipped);
transit time (ie the time taken for the goods to arrive after despatch);
production time (ie the time taken by the buyer to convert the
goods sourced from their supplier into finished goods that can then
be sold to their customers);
stockholding time (ie the time that finished goods have to be stored
by the client in anticipation of orders or call‑off instructions from
their customers); and
time taken for their customers to pay for the goods, once delivered.
Figure 11.2 plots the physical and financial events on a single timeline.
In this example, the client receives a purchase order from their buyer
before placing an order for the required goods with their supplier. The
selling and buying events are shown in parallel. This is a typical closed
loop scenario (sometimes referred to as self‑liquidating) where goods
are sourced to meet specific purchase orders.

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FIGURE 11.2 TYPICAL CLOSED LOOP EXAMPLE

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Performance is key to the success of the physical supply chain. A

company receiving a purchase order from its customer and then having
the need to purchase raw materials and parts to fulfil that order from its
suppliers has to carefully manage its activities to ensure that a failure
on the part of itself or its suppliers does not result in the purchase order
not being fulfilled as per the required specifications and timeframes.
Failure to perform in one part of the supply chain can have a knock‑on
effect on other parts. For example, a car manufacturer that finds a
specific part is not available to support its assembly line may have to
halt production until the part is delivered.
Similarly, the company should employ an equal amount of effort and

planning in managing the implications of financial supply chain events.
In particular, it needs to manage the risk, working capital and cash‑flow
implications so as not to disrupt the flow in the physical supply.
In Figure 11.3 the same scenario is used as in Figure 11.2. In this case,
however, the risk and working capital implications are highlighted as
well.

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FIGURE 11.3 PHYSICAL AND FINANCIAL SUPPLY CHAIN COMBINED

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As Figure 11.3 demonstrates, performance risk reduces as the different

events progress within the supply chain, with credit risk becoming the
primary risk later in the process. However, from the seller’s perspective,
credit risk becomes a real consideration from the time they receive the
purchase order and start to incur cost in relation to fulfilling that order.
CHECK YOUR UNDERSTANDING 2
1) Can you identify the key physical and financial supply

3 chain events in Figure 11.3?
2) What are the financial consequences of the events in the

financial supply chain?
11.3 Understanding the customer need

Supply chain finance is relevant for all segments (major corporates,
mid‑market companies and SMEs). Though supply chain finance is
primarily a financing solution, in some cases it can also provide a
degree of risk mitigation and may incorporate the settlement process.
The benefits that companies are looking for when they adopt a supply
chain finance solution depend on the segment that they occupy.
While SMEs are primarily driven by the need to access finance, larger
corporates tend to have a more varied set of drivers. In the mid‑market
segment, balance‑sheet efficiency is often the primary driver.
Regardless of the segment, it is necessary to understand the business

of each company and its trade cycle in order to determine which supply
chain finance solution will be of most benefit to it.
11.3.1 Trade cycle analysis

The in‑depth analysis of the trade cycle of a company enables the
finance provider to understand the needs of its clients in terms of risk
mitigation, finance and payments.
However, undertaking effective trade cycle analysis also directly

benefits the client. By ‘playing back’ the outcome of the trade cycle

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analysis to the client, the finance provider is enabling the client to see
the impact of their trading arrangements on their cash conversion cycle.
The trade cycle analysis process starts with a detailed analysis of the
physical supply chain. The scope of this analysis will depend on the
size of the client and the sector it operates in.
Understanding SMEs
For example, if an SME client is purchasing finished products from a
few major suppliers in one particular region and selling those products
on standard payment terms in its home market, it will be feasible to
undertake an analysis of the SME client’s entire business in a single
view.
Understanding larger corporates

On the other hand, a larger corporate may have multiple trade cycles
depending on where and how it is sourcing its products, components or
raw materials, and where and how it is selling its finished products or
‘sub‑assemblies’. In such a case, the trade cycle analysis will be pitched
at the ‘line of business’ level and may require a number of different
analyses to be compiled. These will then have to be weighted and placed
into a comprehensive summary that gives a clear picture of the client’s
overall business.
No matter which approach is appropriate, the intention is to add

quantitative and qualitative detail to the high‑level view of the client’s
role in the physical supply chain.
Quantitative detail
This provides clarity regarding funding gaps, risk exposures and
payment flows. Areas that should be examined include:
event timings;
values;
credit periods;
lead times (the period between commitment and shipment);

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transit times;
shipment methods;
suppliers (including manufacturers, wholesalers, producers,

growers, extractors – who they are and where they come from);
buyers (who they are and where they come from);
inspection; and
insurance.
Qualitative detail
This provides a basis for risk assessment and includes the:
reliability of any pre‑sale agreements (eg is the purchase order

robust?);
nature, perishability and saleability of the goods (alternative sources

of repayment);
price volatility of the goods;
track record of successful sourcing from suppliers (performance

risk);
track record of successful sale to buyers (credit risk and performance

risk); and
history of disputes and dispute resolution.
To achieve such quantitative and qualitative analysis will require

capturing the different ‘events’ in the physical and financial supply
chain from sourcing, inventory and selling data, together with the detail
of financial flows. The events to be evaluated include those from past
performance but also the expected pattern of trade over the period to
which the finance will refer.
In addition to the preceding, time should be taken to research the sector

the client operates in and, if possible, obtain relevant financial metrics
from the client’s peer group.

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The following metrics should be sourced:
Days sales outstanding (DSO) – a metric used to measure a

company’s average sales payment terms.
Days purchasing outstanding (DPO) – a metric used to measure a

company’s average supplier payment terms.
Days inventory outstanding (DIO) – a metric used to measure a

company’s average rate of stock turnover.
This information can be revealing for the client during future playback
if, for example, the financier can point to sector trends that are different
to the client’s metrics.
11.3.2 Application of trade cycle analysis

The output from trade cycle analysis is used to finalise the supply chain
finance facility structure and to specify any non‑standard operational
or collateral management controls that may be required. Figure 11.4 is
an example of how financial consequences can be mapped to physical
events in a supply chain. You will see how mapping one against the
other provides a holistic view of a client’s trade cycle.

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FIGURE 11.4 FINANCIAL CONSEQUENCES OF PHYSICAL SUPPLY

CHAIN EVENTS

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The natural progression from understanding a client’s trade cycle is to

then choose which supply chain finance solution will be most suitable
to meet the client’s needs.
Figure 11.5 illustrates where the main products could be used relative
to a typical trade cycle. It should be noted that the trade cycle analysis
might highlight risks and funding requirements that cannot be
addressed using supply chain finance alone. In such cases, a finance
provider might conclude that a structure incorporating trade finance as
well as supply chain finance provides the optimum solution.

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FIGURE 11.5 MAPPING PRODUCTS TO SUPPLY CHAIN STAGES

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11.4 Categorisation of techniques

Supply chain finance techniques can be categorised in a number of ways.
Figure 11.6, first published in the standard definitions, represents the
industry standard and illustrates how these categories are positioned
relative to other financing solutions. This hierarchical model segments
the techniques into three categories:
receivables purchase;
loan/advance‑based; and
enabling framework.
FIGURE 11.6 SUPPLY CHAIN FINANCE CATEGORIES RELATIVE TO

OTHER FINANCING SOLUTIONS
Source: GSCFF (2016, p23)

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11.4.1 Receivables purchase category

The defining characteristic of this category is that the seller of goods or
services obtains finance by selling all or part of the receivable relating
to those goods or services to the finance provider, who becomes the
owner of the receivables.
The method by which ownership of the asset is transferred to the finance

provider varies depending on the jurisdiction, but involves some form
of assignment of title rights. Upon execution of the assignment, the
finance provider pays the seller a sum that is based on the face value
of the receivable.
Key considerations
When a finance provider is contemplating the purchase of receivables,
it will take the following into consideration:
validation that the receivable exists;
verification that the receivable is assignable in the seller’s

jurisdiction; and
confirmation that the receivable is enforceable against the debtor in

the debtor’s jurisdiction.
The title of this category suggests that the receivable is the only asset
that can be purchased by a finance provider. This is not strictly true
as it is also possible to assign inventory to the finance provider and to
create a ‘true sale’. In practice, the agreement with the finance provider
will include a repurchase clause (known as a ‘repo’) so that the goods
are sold back to the client in order for them to sell goods to their
end‑customer.
A facility may be granted ‘with recourse’ or ‘without recourse’ back to

the seller of the asset. In practice, however, the rights of recourse are
not usually quite so clear‑cut, and the receivables purchase agreement
will usually specify the circumstances under which the finance provider
can exercise their right of recourse.
This will have a direct bearing on the balance‑sheet treatment in the

client’s books. The decision regarding balance‑sheet treatment is always

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at the sole discretion of the client’s auditors but, as a guiding principle,

if a finance provider can exercise recourse entirely at their option, then
the auditor would regard this as bank debt. In other words, the finance
would be ‘on balance sheet’.
KEY TERMS
True sale
“[A]n accounting and legal expression connoting that a financial

asset or negotiable instrument has been sold by one party to
another in the sense of no longer being recorded in the balance
sheet of the seller and instead being recorded on the balance
sheet of the purchaser.” (GSCFF, 2016)
Recourse
“[The] legal ability [that] the purchaser of a financial asset may

have to fall back on the original creditor if the current debtor
defaults. For example, an account receivable sold with recourse
enables the buyer of the receivable to make claim on the seller if
the account doesn’t pay.” (Dictionary of Finance and Investment
Terms, 2014)
11.4.2 Loan or advance‑based category

The defining characteristic of this category is that the seller of goods or
services obtains finance by borrowing from the finance provider. The
loan or advance is made in the expectation that it will be repaid from
proceeds of the sale of goods or services.
The finance provider may be prepared to grant the loan without taking
an assignment of the receivable, deriving comfort from the knowledge
that there is a good source of repayment. Alternatively, the finance
provider may be secured by the assignment of the receivable. Though
the process of assigning the receivable is similar to the true‑sale model
set out in the receivables purchase category, in this case, ownership of

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the asset does not transfer to the finance provider. Instead, the finance
provider gets a security interest in the asset.
11.4.3 Enabling framework category

As its name suggests, this category is not a product or direct client
solution but has been included in the standard definitions to make
mention of the bank payment obligation (BPO).
It is worth noting that the BPO:
is an interbank instrument, not a product;
prescribes that the buyer and seller are not actually parties to the
BPO itself (contrary to the indication in the standard definitions) but
are able to benefit from the BPO via separate agreements with their
respective banks;
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 conditionality that, 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 development to enhance its acceptability and

value to clients and banks.
You will learn more about BPOs in section 15.11.
11.5 Supply chain finance solutions

The stages at which individual supply chain finance solutions may be
used to meet client needs are illustrated in Figure 11.7. The supply chain
is segmented into three stages: the purchase order stage, the inventory
stage and the invoice stage. The invoice stage is post‑shipment and
the purchase order stage is pre‑shipment. The inventory stage may
be perceived as either pre‑shipment or post‑import, depending on the
perspective and role of the client.

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FIGURE 11.7 TECHNIQUES RELATIVE TO THE SUPPLY CHAIN STAGE

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11.5.1 Purchase order‑based finance

This focuses on supply chain finance techniques designed to be used in
the pre‑shipment phase of the physical supply chain.
Pre‑shipment finance is relatively common in the traditional trade

finance space, where the finance solution is usually initiated by the
availability of a purchase order for the sale of goods by the borrowing
company to their customer. In trade finance, the pre‑shipment solution
may be structured as either a loan or a conditional undertaking such as
a letter of credit.
Purchase order‑based finance is less common in an open account

context due to the difficulty in securing and controlling the source of
repayment. It is therefore relatively underdeveloped as a supply chain
finance technique.
Common uses of pre‑shipment finance

Pre‑shipment finance, and specifically purchase order‑based finance,
is used to finance the sourcing and conversion of raw materials and
components into finished goods for sale to buyers. The presence of
contractually committed buyers for the goods is a strong risk mitigant,
but finance providers still need to critically evaluate:
performance risk (ie the risk that the buyer is not obliged to pay);
and
credit risk (ie the risk that the buyer cannot pay, and the client
cannot, as a result, repay the advance out of their own resources).
Pre‑shipment finance is usually based on the existence of a purchase

order evidencing a contractually committed end‑buyer, structured with
an inventory finance and/or a receivables finance solution. Ensuring
that the source of repayment can be relied upon and that the cash from
the sale of goods is correctly applied to the pre‑shipment advance
requires effective structuring and transactional control.
Important considerations: sources of repayment

The existence of an acceptable source of repayment (ie through the sale
of goods to the seller’s customers) is an important consideration for

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a finance provider contemplating provision of a purchase order‑based

advance to a client. In many cases, the finance provider will expect
to have visibility of, and a measure of control over the source of
repayment and, if possible, a security interest in the associated asset
(such as the receivable). Often, they will require that the credit quality
of the source repayment (ie the buyer of the goods) be enhanced. This
can be achieved through the use of a letter of credit, a standby letter of
credit, a bank guarantee or credit insurance.
Opportunities for refinancing

On occasion, a finance provider may provide purchase order‑based
finance to finance inventory pending the sale of finished goods to the
seller’s customer. The finance provider may refinance the pre‑shipment
advance with an invoice‑based finance solution once goods are sold.
Alternatively, purchase order‑based finance can be refinanced by a
dedicated inventory finance solution if this is more acceptable to
finance providers.
Client profile
Purchase order‑based finance is an invaluable funding solution for
sellers that:
have a long cash conversion cycle, particularly during the

pre‑shipment period;
have a growing order book, putting pressure on working capital

prior to the point of sale to end‑buyers; and
receive large, one‑off orders.
It works best for sellers when they:
have confirmed purchase orders for the majority of their turnover;
have short product conversion processes (if they are a manufacturer)

or are effectively procuring finished goods for their end‑buyers (if
they are a wholesale distributor); and
know the credit quality of the end‑buyers is acceptable or can be

enhanced.

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Benefits to sellers
Sellers are able to finance the sourcing and conversion of goods for
on‑sale to their customers.
Benefits to buyers
Buyers are not a party to purchase order‑based finance solutions but
benefit indirectly because:
their suppliers can accept higher‑value orders from them;
the risk that their suppliers fail to deliver, having run out of money
before shipment, is reduced; and
the need for advance payments to suppliers may be reduced or

eliminated.
Benefits to finance providers

The extent to which finance providers benefit from this solution, as
opposed to unstructured debt, is dependent on the structure and
conditionality of the pre‑shipment finance facility. Finance providers
will take comfort from the successful trading relationships between
parties, good track record of contractual fulfilment by sellers and the
credit standing of end‑buyers. They have the opportunity to derive the
following benefits:
visibility – they know what the advance is to be used for and the
eventual source of repayment;
control – they might be able to control the disbursement of funds to

suppliers and collection of funds from buyers; and
security – they might have a security interest in the inventory and

the eventual receivable.
11.5.2 Inventory‑based finance

Inventory is created when goods are:
held for sale by a retail dealer;
stored in a warehouse by a distributor;

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being converted into finished goods in a factory by a manufacturer;

or
in transit prior to being sold to buyers.
The inventory itself may comprise raw materials, work‑in‑progress and

finished goods (if the client is a manufacturer) or just finished goods if
they are a wholesale distributor or a retailer. In practice, inventory‑based
finance will usually be used to finance goods that are in a condition
whereby they are ready for sale as finished goods or commodities.
Inventory finance is offered in various forms and is thus quite bespoke

in its nature. As highlighted in the standard definitions, variations
include:
asset‑based lending – “a borrowing base is [created] whereby a

maximum level of finance is made available against a calculated
market value of goods [. . .] being financed less a margin which will
vary according to” the nature and saleability of the goods and the
extent to which they are pre‑sold;
true sale – “where the inventory is removed from the (original)

inventory owner’s balance sheet [and] the finance provider enters
into a” retention of title agreement for the goods being financed; and
floor plan finance – a manufacturer places finished stock in the

hands of a distributor or dealer with funding provided by the finance
provider.
(GSCFF, 2016)
In the sections that follow, you will learn about the following techniques:
loan or advance against inventory; and
distributor finance.
11.5.2.1 Loan or advance against inventory

This technique is described in the standard definitions as follows:
“Loan or advance against inventory is financing provided to a buyer

or seller involved in a supply chain for the holding or warehousing of

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goods (either pre‑sold, unsold, or hedged) and over which the finance
provider usually takes a security interest or assignment of rights and
exercises a measure of control.”
(GSCFF, 2016, p56)
FIGURE 11.8 LOAN OR ADVANCE AGAINST INVENTORY
Inventory finance may be regarded as either pre‑shipment (ie the client

is the seller) or post‑shipment (ie the client is the buyer).
The finance provider will take a security interest in, and exercise a
measure of control over, the inventory. The source of repayment will be
derived from the proceeds of sale of the inventory to end‑buyers. The
reliability of the source of repayment is, therefore, critically important
to the viability of the solution.
Nature of the goods
The nature of the goods has a material impact on the reliability of the
source of repayment.
Commodities – finance providers are likely to readily accept

commodities that are quoted on a terminal exchange, are readily

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saleable, and can be hedged to protect against price volatility as

security.
Finished goods that have been pre‑sold are a more attractive

proposition where there are contractually committed buyers for at
least the majority of the inventory. Finance providers may be happy
with a percentage of unsold goods (often known as buffer stock)
and may even be prepared to finance stock that is entirely unsold
if the goods are generic and there is regular demand from multiple
buyers, making the goods relatively saleable.
Work‑in‑progress is the hardest type of inventory to value and is

usually not attractive to finance providers. There are, of course,
exceptions, and if there are contracted orders for the finished
goods and the client is a manufacturer with a strong track record
of successful production of relatively generic goods, the finance
provider might be prepared to proceed, although the loan‑to‑value
percentage is likely to be relatively low.
Benefits to sellers
If a seller has inventory that is suitable for this type of finance and has
an acceptable source of repayment it can obtain pre‑shipment funding
using this solution.
Benefits to buyers
If a buyer is holding inventory pending sale, and the suitability criteria has
been met, it can use this solution to obtain funding to pay its suppliers.
Benefits to finance providers
This solution provides an opportunity to benefit from a security interest

in and control of pre‑sold or readily saleable goods coupled with an
acceptable source of repayment.
LOAN TO VALUE
The amount advanced relative to the value of the asset securing

the advance.

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11.5.2.2 Distributor finance

“Distributor finance is the provision of financing for a distributor of

a large manufacturer to cover the holding of goods for re‑sale and to
bridge the liquidity gap until the receipt of funds from receivables
following the sale of goods to a retailer or end‑customer.”
(GSCFF, 2016, p52)
FIGURE 11.9 DISTRIBUTOR FINANCE: STEPS IN THE PROCESS
Distributor finance programmes are designed to support the relationship

between the manufacturer and its distributors. The finance is there to
facilitate increased stocking by the distributor and onward sales to
end customers. It is typically offered (primarily by banks) as a loan or
advance, where the client is the onward seller of the goods, against the
sales invoice generated by a major manufacturer.
Distributors attracted to this type of arrangement are typically SMEs

that will be drawn to the cheaper pricing of the finance and possibly the
increased ‘tie‑in’ with the manufacturer.
The manufacturer is often called the ‘anchor party’ in this context,

although it is not necessarily party to the financing arrangement itself.
The manufacturer is central to the programme and, because it has a

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vested interest in the successful performance of its distributor network,

it will typically sponsor the financing arrangement by having a master
distributor finance agreement with the finance provider.
Such finance is typically provided by way of a loan or advance directly

to the distributor to fund inventory and receivables on a short‑term
basis.
This finance solution addresses a particular need where there is a

material timing gap between the date the distributor has to pay the
manufacturer supplying them and the date the goods can be sold, and
the resulting receivables converted to cash.
The following are the main features of distributor finance:
Master distributor finance agreement between the manufacturer

and the finance provider that will typically outline the parameters
of the programme, including:
—— the agreed terms of engagement;
—— the geographies being covered;
—— the operating model and processes applying to the finance

provider, anchor and the distributors; and
—— any risk sharing or agreement to buy back or find alternative

outlets for inventory where a distributor fails.
Finance agreement between the finance provider and distributor

that will normally include an assignment of rights over inventory
and receivables.
Benefits to manufacturers
Manufacturers benefit from being able to push their products out into
their distributor network with guaranteed and immediate payment from
their finance providers. They are also able to exercise more control and
influence over their distributor network and consequently support their
sales growth into new territories.
Additionally, some finance providers offer web‑based platforms

specifically tailored to a multinational anchor that provide programme

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information to distributors and can be used as an onboarding vehicle that

creates visibility between the anchor, its distributor and finance provider.
Some of these platforms also facilitate purchase order approvals, invoice
confirmations and the handling and tracking of payments and drawdowns.
Benefits to distributors
Distributors, which are often SMEs and may be in countries with

restricted access to finance, benefit from the availability of finance and
pricing that reflects the involvement of the manufacturer. Such pricing
will often be cheaper when compared with the cost of funding that the
distributor may be able to arrange for itself.
11.5.3 Receivables based finance

The standard definitions differentiate between the legal constructs of
a loan or advance against receivables and receivables purchase. These
terms are defined as follows:
Loan or advance against receivables – “financing made available

[. . .] on the expectation of repayment from funds generated from
current or future trade receivables.”
Receivables purchase – “sellers of goods or services obtain financing

by selling all or a part of their receivables” relating to those goods or
services to the finance provider.
(GSCFF, 2016)
11.5.3.1 Loan or advance against receivables

“Loan or advance against receivables is financing made available to a

party involved in a supply chain on the expectation of repayment from
funds generated from current or future trade receivables and is usually
made against the security of such receivables, but may be unsecured.”
(GSCFF, 2016, p9)

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FIGURE 11.10 LOAN OR ADVANCE AGAINST RECEIVABLES
This is a loan or advance where the client is the seller of the goods or
services. The finance provider regards the receivables as the source of
repayment but will also retain recourse to the client in the event that
the receivables are not realised or are not sufficient to fully liquidate
the loan or advance.
This form of financing is provided against a receivable and is appropriate

when a seller has or will acquire receivables arising from its business
activities as a seller of goods or services.
Typical clients
Such loans are generally offered to sellers that are deemed very
creditworthy by the finance provider and whose existing or future dated
receivable is free from any potential encumbrance that may affect its
validity and payment.
It is, therefore, more likely that the loan will be provided to a

well‑established mid‑market company or a large‑sized corporate that
can demonstrate a good track record of performance.
Monitoring
Some finance providers, recognising that a receivables portfolio is

ever‑changing with new invoices raised and settlement received on an
ongoing basis, may establish a borrowing base that regulates the amount
they are willing to advance at any one time. Where a borrowing base is
used, rigorous monitoring gives the finance provider visibility of those

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assets that constitute the loan’s security. Such monitoring may involve
self‑certification by the client. The finance provider will calculate the
level of the loan it is willing to advance based on its borrowing‑base
criteria.
Credit risk
The finance provider may also take a view on the credit risk standing
of the buyers and evaluate whether the buyers are good for the amount
being invoiced. In addition, they will also need to be comfortable that,
should it become necessary to realise the security in the receivable in
a given jurisdiction, payment of the receivable can be enforced. Some
finance providers will require credit insurance to be in place as an
added mitigant.
Benefits to sellers
The primary benefit to sellers is the release of working capital prior to

the repayment of the receivable by their buyers.
Such a loan may be used to enable a seller to offer more attractive

credit terms to their buyer in order to promote more sales, or to fund
an opportunity that requires the seller to raise liquidity in advance of
its normal payment terms.
Benefits to buyers
There is no direct benefit to buyers but, as mentioned, they may benefit

from longer payment terms, which their seller may be able to cover
through the raising of the loan.
11.5.3.2 Receivables discounting

“Receivables discounting is a form of receivables purchase, flexibly

applied, in which sellers of goods and services sell individual or multiple
receivables (represented by outstanding invoices) to a finance provider
at a discount.”
(GSCFF, 2016, p28)

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FIGURE 11.11 RECEIVABLES DISCOUNTING:TRANSACTION FLOW
The fundamentals of any receivables purchase facility are that the

receivable:
exists;
can be clearly identified and validated;
is assignable; and
is enforceable against the debtor in that debtor’s jurisdiction.
The main feature of a receivables discounting solution is that it is not a

loan but the purchase of a receivable through an assignment or pledge
of that receivable.
Typical clients
The facility is generally offered to major corporates looking to remove

the trade receivable from their balance sheet and avoid having the
advance classified as bank debt (ie taking the financing off balance
sheet). This means that the corporates will require that the facility is
undisclosed to their buyers and structured on a true‑sale basis with no

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or limited recourse back to them. They will also push for an advance
based on 100 per cent of the face value of the receivable.
Achieving the desired accounting treatment is, however, at the discretion

of the seller’s auditor and, while the finance provider can structure the
facility to fulfil what they and the buyer believe will meet the criteria
for an off‑balance‑sheet solution, it cannot be guaranteed.
Greater complexity
It is common for this type of arrangement to be fairly complex as the major

corporate may wish to structure a facility over multiple jurisdictions,
involving its own overseas subsidiaries as sellers of the receivable with
buyers that are also in multiple countries. This will entail a high level
of legal and regulatory due diligence across the jurisdictions to ensure
that the receivable exists, can be assigned and can be enforced against
the debtor in their jurisdiction.
Off‑balance‑sheet treatment is not always a key requirement, especially

with sub‑investment grade or medium‑sized companies. The finance
provider may be willing to structure a facility on a true‑sale basis but,
for credit risk purposes, will require that the receivable is disclosed
to the buyers of the company concerned. In such cases, the collection
of the receivable may be undertaken by the finance provider or by the
seller as agent for the finance provider.
Benefits to sellers
For major corporates that face the pressures of increased global

competition, market scrutiny and capital adequacy regulation,
receivables discounting programmes offer an alternative approach that
can provide the corporate treasurer with a more cost‑effective solution
than is possible with more traditional bank funding.
Many of the receivables discounting programmes are now supported by

technology‑led platforms that allow for the greater visibility and sharing
of data and automated calculation of availability within the facility. As
a result, transactional control and collateral management has become a
more manageable process.

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11.5.4 Factoring and invoice discounting

Factoring and its variations are described in the standard definitions as
follows:
“Factoring [and factoring variations] is a form of receivables purchase,

flexibly applied, in which sellers of goods and services sell their
receivables (represented by outstanding invoices) at a discount to a
finance provider (commonly known as the ‘factor’). A key differentiator
of factoring is that typically the finance provider becomes responsible
for managing the debtor portfolio and collecting the payment of the
underlying receivables.”
(GSCFF, 2016, p39)
FIGURE 11.12 FACTORING
Key features
Invoice discounting is a variation of factoring. The main feature of both
is that they do not involve a loan but instead require the purchase of
a receivable through an assignment or pledge of that receivable at a
discount. For many companies, the headline percentage of funding of

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80–90 per cent of eligible debts may represent an actual financing of 70

per cent or less of the total receivables value. Nevertheless, the level of
finance that can be raised against the value of receivables will be higher
than when trying to utilise the same asset for a loan or overdraft.
The majority of factoring or invoice discounting facilities are

predominantly domestically orientated and where export finance is
provided, the finance provider needs to be satisfied that the debt can
be enforced against the debtor in the debtor’s jurisdiction.
Distinction between factoring and invoice discounting

The main distinction between factoring and invoice discounting is
that, in most markets, the term factoring is used to describe a product
that includes management of the debtor portfolio and collection of the
payment, as well as the provision of finance. Invoice discounting, on
the other hand, is generally used to describe a finance‑only solution.
The factoring solution is normally disclosed to the debtors with the

seller inserting a notice of assignment on the invoice that informs the
debtor that the debt has been assigned to the finance provider and can
only be discharged on receipt of payment by the finance provider into
a designated collection account.
Invoice discounting is generally offered on an undisclosed basis, where

the buyer is not informed of the assignment but is still directed by the
seller to make their payment into a collection account that could be in
the name of the seller but controlled by the finance provider.
Recourse or non‑recourse
Both can also be offered on either a recourse or non‑recourse basis to
the seller in the event of a default by the buyer. Where non‑recourse is
offered, the finance provider may utilise credit insurance as an added
mitigant to the risk of debtor default. As with other non‑recourse
receivables finance, the finance provider will still have rights of recourse
to the seller in the event of contractual dispute.
Whole‑turnover basis
The majority of factoring or invoice discounting facilities offered
through banks are provided on a whole‑turnover basis, where the finance

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provider takes ownership of all the receivables generated by the seller

and creates an availability of finance against a basket of receivables
that fits within the financing parameters agreed with the seller.
Other finance providers and platforms predominantly offer selected

or single invoice finance, whereby the seller can sell an invoice (often
through an online platform) and either the platform provider or other
funders can bid to purchase the invoice. Unlike the whole‑turnover
arrangements, the seller is not assigning their whole receivables
portfolio but, in this case, the funder must be satisfied that the invoice
being funded is not already pledged elsewhere.
Benefits to sellers
The majority of companies that are attracted to factoring and invoice
discounting are SMEs who may have limited access to working capital
or do not have the fixed assets required by banks as security for bank
loans. Having an invoice‑based facility such as factoring or invoice
discounting that mirrors the growth of the business is an effective way
of releasing cash into the business.
Where the seller has a level of dependency on one or a few customers,

depending on their creditworthiness, a non‑recourse option provides
some comfort and protection from customer default, which may affect
the viability of the seller to continue trading.
11.5.5 Forfaiting
“Forfaiting is a form of receivables purchase, consisting of the without

recourse purchase of future payment obligations represented by
financial instruments or payment obligations (normally in negotiable
or transferable form), at a discount or at face value in return for a
financing charge.”
(GSCFF, 2016, p34)

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FIGURE 11.13 FORFAITING:TRANSACTION FLOW
Forfaiting was historically used to finance the export of primarily

capital goods with tenors of five to seven years. Often, the payment
terms would specify stage payments on, perhaps, a semi‑annual basis
starting after an initial grace period. These regular payment obligations
would be evidenced by a ‘bundle’ of promissory notes bearing maturity
dates that matched the payment schedule. More recently, forfaiting has
been used to address short‑term working capital requirements with
tenors as short as six months.
Forfaiting transactions differ from other forms of receivables purchase

as the finance provider is providing funding against an acceptable
instrument and payment obligation, which may include a:

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bill of exchange;
promissory note;
deferred payment undertaking under a letter of credit; and
receivable (provided it is evidenced by an acceptable instrument

and payment obligation).
The financial instrument or payment obligation may or may not be

guaranteed by a third party. With a bill of exchange or promissory
note, a bank may guarantee the undertaking of the acceptor or issuer
respectively by adding its aval (guarantee) to the instrument itself.
Alternatively, the bank may issue a separate guarantee or standby letter
of credit by which it commits to pay the holder of the instrument should
it be dishonoured at maturity.
URF 800
Forfaiting transactions in the main incorporate the Uniform Rules for
Forfaiting ICC Publication 800 (URF), which sets out, among other things,
a limited recourse regime and standards for examining documents. Sales
using the URF are designed to achieve true‑sale accounting treatment.
Transactional‑based solution
The use of financial instruments and the clear distinction between the
payment obligation being financed and the underlying commercial
contract make this an effective solution in the right circumstances.
Better suited to transactional finance than flow‑based finance, forfaiting
is arguably a very traditional trade finance product. It justifies inclusion
within the family of supply chain finance techniques because it is often
seen as a more robust alternative to an open‑account receivables finance
solution and a tradable alternative to a letter of credit.
Forfaiting is an effective solution for clients whose businesses exhibit

the following characteristics:
goods or services are sold on deferred payment terms between 180

days and several years;

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individual transactions are of high value (eg in excess of USD100,000);

and
each transaction needs to be financed on an individual basis.
Typical clients
In addition, clients seeking to use forfaiting to finance receivables are
likely to be:
involved in contracts that specify stage payments;
trading with customers in emerging or difficult markets; and/or
in the mid‑market and major corporate segments rather than the

SME segment.
The forfaiter may well be prepared to hold the asset on their books until
maturity but, if this is not attractive to them, they can sell the payment
obligation in the secondary market. The ability to distribute the asset
(ie sell it) on a true‑sale basis is an intrinsic feature of forfaiting.
Benefits to sellers
Sellers are able to accelerate their receivables in respect of goods or
services sold to customers on deferred payment terms. The seller
receives discounted proceeds when they sell the financial instrument
or transfer the payment obligation to forfaiters, rather than having to
wait until the due date for their cash.
Off balance sheet and non‑recourse

This is an off‑balance‑sheet solution with finance provided on a
non‑recourse basis. The buyer’s payment obligation is the vehicle for
the provision of finance and this obligation is independent of the rights
and obligations under the commercial contract. This means that, once
they have issued the payment obligation, the buyer is obliged to pay
even if they have legitimate grounds to withhold payment under the
commercial contract due to alleged contractual default by the seller.
11.5.6 Payables finance


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“Payables finance is provided through a buyer‑led programme within

which sellers in the buyer’s supply chain are able to access finance by
means of a receivables purchase. The technique provides a seller of
goods and services with the option of receiving discounted value of
receivables (represented by outstanding invoices) prior to their actual
due date and typically at a financing cost aligned with the credit risk of
the buyer. The payable continues to be due by the buyer until its due
date.”
(GFSCF, 2016, p45)
FIGURE 11.14 PAYABLES FINANCE
The payables finance facility is agreed between the buyer and the
finance provider. The sellers involved in the buyer’s supply chain are
invited to participate in the programme.
A buyer‑centric model
This is a buyer‑centric model where the buyer will look to put in
place a payables finance programme with one or a number of finance

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providers. These programmes are geared to provide the buyer with an

off‑balance‑sheet solution on an unsecured and uncommitted basis,
with the bank marking a credit limit on the buyer and providing an
accelerated payment at a discount to the seller, up to the limits set
within the programme.
The approval by the buyer is predicated by an agreement between

the buyer and the finance provider that includes an unconditional,
irrevocable commitment to pay the finance provider on the invoice
due date. The finance provider relies on this undertaking, obviating the
need to consider the credit standing of the seller.
Typical clients
The majority of buyer‑led programmes are put in place by investment
grade buyers that are looking for finance providers to sign a receivable
purchase agreement with their suppliers to purchase receivables owed
by their buyers. In this way, major corporate buyers are hoping to achieve
an off‑balance‑sheet solution and avoid an increased level of bank debt.
Onboarding
This is often a challenging and complex process for finance providers
as full customer due diligence involving know your customer (KYC) and
anti‑money‑laundering (AML) checks must be carried out on suppliers.
Suppliers are unlikely to be existing customers and may be domiciled
in a territory that the bank does not operate in. You have learned about
required due diligence in Topic 5.
Attractiveness of non‑bank providers

Non‑investment grade buyers tend to enter into programmes
with non‑bank finance providers as the balance sheet treatment
considerations are less acute. However, debt capacity and credit appetite
considerations still arise. Non‑bank finance providers will often obtain
credit insurance against the buyer’s obligations or enter into funded
risk participations with other investors.
Benefits to buyers
Buyers putting in place a payables finance programme will often do so
as part of their drive to:

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optimise liquidity through an extension of agreed payment terms;
standardise terms across their supplier base; and
achieve cost reductions within their supply chain by enabling a

lower cost of finance for their suppliers.
A further potential benefit for buyers relates to the accounting treatment.

The aim is typically to ensure that the payables finance programme does
not result in the reclassification of trade creditors as bank debt. This
is particularly important for investment grade buyers whose balance
sheet ratios are analysed by investors. Any perceived increase in bank
debt can have a detrimental effect on market sentiment.
Benefits to sellers
These include:
an immediate cash benefit with the knowledge that the cost of

finance provided by this type of programme will reflect their buyer’s
credit‑standing and for most suppliers will be cheaper than their
normal cost of funds; and
a reduction in the seller’s risk by, in effect, turning a major customer

into the equivalent of a cash sale.
However, sellers will also have to consider that the increased tie‑in with
their buyers may mean more pressure to reduce their prices as their
buyers will have influenced their cost of finance.
11.6 Innovation in supply chain finance

Developments in e‑invoicing
The digitisation of both the physical supply chain and the financial
supply chain has been the subject of a great deal of development and
investment. Companies already send purchase orders to each other
electronically. The growth of e‑invoicing has also enabled a more
immediate electronic communication between trading parties.

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E‑bills of lading and other electronic documents

Ongoing development to digitise other key documents, such as
inspection reports, and the creation of an e‑bill of lading will ease the
transformation to a completely digitised and transparent trade and
transaction cycle. Such developments and their effects on the world of
trade and supply chain finance are covered in Topic 15.
Role of distributed ledger technology and smart contracts

Supply chain finance solutions today are predominantly invoice‑driven.
The advances in technology and digitisation mean the opportunity to
extend supply chain finance to delivering an end‑to‑end solution will
be possible, covering the purchase order and inventory stages of the
trade cycle. However, most of the distributed ledger and smart contract
collaborations in place today are more focused on improving the
management and delivery of existing trade and supply chain finance
solutions rather than on new product development. You will explore
this in more detail in Topic 15.
Entry of digital disruptors

As a consequence of the 2007–08 global financial crisis, banks have
been required to strategically review the deployment of their capital.
This has created the opportunity for new entrants to become disrupters
of the status quo, using their agility to capture business from banks and
existing financial institutions. Many have developed or adapted new
technology and e‑platforms aimed at SMEs with a promise to provide
a more customer‑friendly and quicker service, without having to go
through the laborious onboarding and credit processes employed by
banks and others.
Efficient delivery of traditional solutions

However, most of these alternative finance providers have not
necessarily created new product solutions and have replicated the
existing post‑shipment factoring and/or payables finance solutions.
They have succeeded in being more flexible and providing immediate
finance against an upload of single or multiple invoices, with speedier
credit decisions often employing automated credit algorithms.

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11.6.1 Dynamic discounting

One effective use of technology that has added to the functionality
of payables finance is dynamic discounting. Although this is not
one of the supply chain finance techniques included in the standard
definitions, this is a positive development led by financial technology
firms (fintechs).
During economic or political uncertainty, it is normal for major corporate

businesses to postpone investment decisions with a preference to pay
down debt or hold on to their cash reserves.
For some major corporate companies this has led to the adoption of
dynamic discounting, a variation of payables finance. Here, fintechs
have taken the age‑old principle of settlement discount (where a buyer
agrees early payment with their supplier for a discount) and used data
analytics to create tools for the major corporate.
These software applications enable companies to look at how best

to use free cash while offering suppliers early payment. In addition,
some dynamic discounting platforms have teamed up with banks who
become substitute funders when the major corporate company wishes
to deploy its cash elsewhere.
Conclusion
In this topic you learned about the relationship between the physical
and financial supply chains. You were also introduced to trade cycle
analysis and various supply chain finance solutions and techniques as
defined in the standard definitions published by the GSCFF.

383
TOPIC 11
THINK AGAIN . . .
Now that you have completed this topic, how has your
knowledge and understanding improved?
For instance, can you:
define supply chain finance?
highlight the differences between traditional trade

finance and supply chain finance?
explain how trade cycle analysis helps finance providers

understand their customers?
distinguish between the high‑level categories outlined

by the GSCFF?
discuss the benefits of particular supply chain finance

techniques and solutions in various scenarios?

384
Test your knowledge
?
Use these questions to assess your learning for Topic 11.
Review the text if necessary.
Answers can be found at the end of this book.
1) Which of the following is a characteristic of supply chain

finance?
a) Issuance of warehouse receipts for the storage of

goods.
b) Financing and risk mitigation techniques and

practices that are driven by events in the physical
and financial supply chains.
c) The shipment of goods by sea, air, road or rail.
2) Which of the following statements is true?
a) A physical supply chain usually involves at least

three parties.
b) Each party is either a buyer or a seller.
c) The final link in the physical supply chain is the

retailer.
3) With regard to trade cycle analysis, which of the following

statements are true? Select all that apply.
a) The aim of trade cycle analysis is to determine the

level of gross and net profit a client is expected to
make.
b) DSO, DPO and DIO are metrics used to measure key

aspects of the client’s cash conversion cycle.
c) Trade cycle analysis involves both quantitative and

qualitative analysis of the financial impact of events
in the physical and financial supply chains.

385
TOPIC 11
4) With regard to the categorisation of supply chain finance

techniques by the Global Supply Chain Finance Forum,
which of the following statements is true?
a) All supply chain finance techniques involve the

purchase of receivables.
b) Supply chain finance always uses promissory notes

to evidence an approved payable.
c) The three categories are defined as receivables

purchase techniques, loan/advance‑based techniques
and an enabling framework.
5) With regard to supply chain finance solutions, which of

the following statements is true?
a) Inventory held by a seller can be financed by a

receivables discounting solution.
b) Payables finance can be used to finance both

inventory and receivables.
c) Purchase order‑based finance can usually be provided

without recourse to the client.
References
Bugeja, J. and Taylor, L. (2018) Certificate in Supply Chain Finance. The London Institute of Banking &
Finance.
Dictionary of Finance and Investment Terms (2014) Recourse [online]. Hauppauge: Barron’s
Educational Series, Credo. Available through KnowledgeBank website at: https://search.
credoreference.com/content/entry/barronsfin/recourse/0 [Accessed: 10 October 2018].
GSCFF (2016) Standard definitions for techniques of supply chain finance [pdf]. Available at: https://cdn.
iccwbo.org/content/uploads/sites/3/2017/01/ICC-Standard-Definitions-for-Techniques-of-Supply-
Chain-Finance-Global-SCF-Forum-2016.pdf [Accessed: 10 October 2018].
GSCFF (2017) Global Supply Chain Finance Forum [online]. Available at: http://supplychainfinance
forum.org/ [Accessed: 10 October 2018].
ICC Banking Commission (2017) Rethinking trade & finance [pdf]. Available at: https://cdn.iccwbo.
org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf [Accessed: 10 October
2018].

386
Further reading
GSCFF (2016) Standard definitions for techniques of supply chain finance [pdf]. Available at: https://cdn.
iccwbo.org/content/uploads/sites/3/2017/01/ICC-Standard-Definitions-for-Techniques-of-Supply-
Chain-Finance-Global-SCF-Forum-2016.pdf [Accessed: 20 October 2018].
GSCFF (2017) Global Supply Chain Finance Forum [online]. Available at: http://supplychainfinance
forum.org/ [Accessed: 20 October 2018].
ICC Banking Commission (2017) Rethinking trade & finance [pdf]. Available at: https://cdn.iccwbo.
org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf [Accessed: 20 October
2018].

387
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TOPIC 11

Supply chain finance

By the end of this topic, you will understand:

 terminology related to supply chain finance;

 business drivers that create a demand for working capital finance;

 different techniques of supply chain finance and how they operate;

 innovative approaches, new entrants and the positive impact of

© The London Institute of Banking & Finance 2019

Consider businesses your bank or financial technology

11.1 What is supply chain finance?

STANDARD DEFINITIONS FOR TECHNIQUES IN

“Supply chain finance (SCF) is defined as the use of

This definition refers to the application of supply chain finance

 shipping documents are not controlled through the banking system

© The London Institute of Banking & Finance 2019

 the importer’s bank does not make a conditional undertaking to pay

 the importer settles with the exporter directly by making a clean

According to the ICC Banking Commission publication Rethinking Trade

Standard definitions for techniques in supply chain

Explore the GSCFF website at: http://supplychain

The standard definitions are available online and

Another useful resource is the ICC Banking

11.1.1 The key characteristics of supply chain finance

© The London Institute of Banking & Finance 2019

Portfolio of risk mitigation techniques and practices

© The London Institute of Banking & Finance 2019

chain is driven by an event or ‘trigger’ in the physical supply chain.

Evolving and flexible

11.1.2 Differences between trade finance and supply chain

The distinction between trade and supply chain finance is becoming

© The London Institute of Banking & Finance 2019

TABLE 11.1 CHARACTERISTICS OF TRADE FINANCE AND SUPPLY

Characteristic Trade finance Supply chain finance

Level of bank More likely to be high. More likely to be low.

Transactional More likely to be high. More likely to be low.

Basis of finance More likely to be More likely to be flow‑based.

Pre‑ and More likely to be high. More likely to be restricted

© The London Institute of Banking & Finance 2019

11.2 Understanding supply chains

Supply chains, whether simple or complex, work on the basis of

11.2.1 The physical supply chain

© The London Institute of Banking & Finance 2019

FIGURE 11.1 PRIMARY PARTIES

Source: Bugeja and Taylor (2018)

TABLE 11.2 PARTIES AND ROLES

Party Supply chain role

Seller Raw material producer Extraction

Buyer and seller Manufacturer Manufacture

Inventory (raw material,

Buyer and seller Wholesale distributor Distribution

Inventory (bulk finished goods)

Buyer and seller Retailer Retail inventory (unit‑level

Buyer Consumer Consumption

Source: Bugeja and Taylor (2018)

© The London Institute of Banking & Finance 2019

internationally, has been to gain efficiencies through globalisation.

11.2.2 The financial supply chain

Each event has financial consequences: sourcing has to be paid for,

CHECK YOUR UNDERSTANDING 1

terminology related to supply chain finance;

business drivers that create a demand for working capital finance;

different techniques of supply chain finance and how they operate;

innovative approaches, new entrants and the positive impact of

shipping documents are not controlled through the banking system

the importer’s bank does not make a conditional undertaking to pay

the importer settles with the exporter directly by making a clean

the loading on board is the ‘event’; and

the document (providing details of the shipment) to the seller

the execution of the inspection itself is the ‘event’; and

the inspection report is the ‘information’.

details of seller and buyer;

description of goods or services;

price and payment terms;

delivery details and shipping terms; and

a unique purchase order number.

lead times (the period between commitment and shipment);

suppliers (including manufacturers, wholesalers, producers,

buyers (who they are and where they come from);

reliability of any pre‑sale agreements (eg is the purchase order

nature, perishability and saleability of the goods (alternative sources

price volatility of the goods;

track record of successful sourcing from suppliers (performance

track record of successful sale to buyers (credit risk and performance

history of disputes and dispute resolution.

Days sales outstanding (DSO) – a metric used to measure a

Days purchasing outstanding (DPO) – a metric used to measure a

Days inventory outstanding (DIO) – a metric used to measure a