Supply Chain Financing: Making Globalization Work for You
Globalization creates supply chain challenges. It also creates incredible business opportunities. If you’re a retail vendor supplier, you’ve probably experienced both. This is why it’s important to consider supply chain financing as a way to enhance your opportunities and end any supply chain nightmares.
Getting the Most Out of Globalization with Supply Chain Financing
Here’s an example: selling cars to Malaysia is a great business opportunity. However, a company likely won’t receive payment for those cars until the cargo ship crosses (at least) an ocean. That translates into enormous cash flow gaps. A company must invest resources and then wait weeks or months for payment.
Worse yet, if something interrupts the supply chain, the ripple effects can be enormous. It could even kill a business. Little has to go wrong for customers to make late payments. Even if your company has handle its long supply chain well in the past, no guarantee exists that problems will not arise. All long supply chains have inherent risks.
Fortunately, globalization offers a powerful and dynamic set of financial tools centered around supply chain financing. These tools encompass opportunities ranging from factoring to invoice financing and peer to peer (P2P) lending.
These financial tools are changing financial management. If you’re going to come out of this globalized world a winner, you need to be using supply chain financing to its fullest.
What Are Your Supply Chain Financing Options?
Wade Morgen / Flickr / CC BY-NC
The general idea behind supply chain financing is to avoid traditional bank loans and lines of credit. This is critical because of the inherent inefficiencies and complications. This is largely driven by the paperwork involved and the reluctance of most banks to make credit available throughout the entire supply chain.
Two basic types of supply chain financing exist:
- Factoring: One of the original types of supply chain financing. Here, a factoring company purchases an item on your accounts receivable and pays you a percentage (usually between 70% and 90%), minus a fee, within a day or two. The factoring company then assumes full responsibility for collecting the payment. Furthermore, it sends you the remaining 10% to 30% once they receive it. Factoring is often used by companies expanding overseas to ease the initial difficulties of dealing with foreign purchasers.
- Invoice Discounting: Almost identical to factoring, invoice discounting has one important difference. Here, the company providing the service does not assume responsibility for collecting the payment. This makes it a better solution for companies looking to develop relationships with their purchasers, or those that don’t want to risk creating an impression of cash flow problems.
How P2P Lending Takes Supply Chain Financing to Another Level
Within the world of supply chain financing, P2P lending is the cutting edge. It further aims at financing from a wider variety of points within the supply chain. Whereas factoring and invoice discounting focus entirely on financing accounts receivable, obviously there are many more steps within a purchase order lifecycle, which have room for greater optimization and financing.
Meanwhile, the technologies behind P2P lending create small lending networks for everyone involved in the supply chain and allow investors to provide financing at all stages. Every stage of the process is sped up, and additional incentives are provided for all parties to comply with standards and schedules.
That doesn’t mean factoring and invoice financing don’t have a role to play — they absolutely do. With P2P lending, it just becomes clear that greater diversification within supply chain financing has the potential to stabilize and enhance the entire process. So, how does that further play out in practice?
From Investors to Suppliers, P2P Lending Networks Benefit Everyone
Uli Harder / Flickr / CC BY-NC-SA
By digital P2P lending which integrate investors, suppliers, and subcontractors, new digital technologies are creating flexible financial networks to supply cash whenever it’s needed within the supply chain.
For suppliers, this means accessing early payments on an approved invoice, while for investors it means having access to new investment opportunities within global supply chains. For everyone, it means cutting down on costs by digitizing a variety of processes. So far, these techniques have shown incredible results.
These techniques are just beginning to catch on with large multinationals who realize even they are at risk of supply chain disruptions and need greater levels of cooperation between procurement and finance divisions. Ultimately, the best approach is going to vary based on the business model and specifics of the supply chain. However, if your business has a long supply chain, there are powerful tools for you within supply chain financing.
Incorporating Invoice Discounting Into Your Supply Chain Revolution
Finally, it should be clear that supply chain financing is a must. The technology is there (supplier portal), you just need to find what works best for your company.
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