Trade Finance Forum › Forums › Market Regulations › Compliance › I’m interested in using supply chain financing to finance my trade transactions. How does it work, and what are the benefits and risks associated with this method?
May 3, 2023 at 1:19 pm #2276Busra AiseParticipant
I’m interested in using supply chain financing to finance my trade transactions. How does it work, and what are the benefits and risks associated with this method?May 3, 2023 at 1:22 pm #2279Yash ChopraParticipant
Supply chain financing is a method of financing trade transactions that involves a financial institution providing financing to the supplier of goods or services, based on the creditworthiness of the buyer. The supplier can then receive payment for their goods or services immediately, while the buyer can defer payment to a later date.
One of the main benefits of supply chain financing is that it can improve cash flow for suppliers, allowing them to access financing at a lower cost than traditional methods such as loans or factoring. It can also reduce the risk for buyers by allowing them to negotiate more favorable payment terms with their suppliers.
However, there are also risks associated with supply chain financing. For example, suppliers may become overly reliant on this financing method, which can lead to issues if the buyer defaults on their payments. Additionally, supply chain financing can be complex and require coordination between multiple parties, which can create operational challenges.
To initiate SCF, KYC and due diligence are performed on both the buyer and supplier to validate their eligibility. The supplier invoices the buyer and transfers the invoice to the financing company, which advances approximately 80% of the notional amount. At maturity, the buyer pays the full amount of the invoice, which is then transferred to the financing company’s accounts. The financing company repays the supplier the remaining 20% minus the agreed fees.
It is usually difficult to source, conduct due diligence, and execute loans in large markets like Asia from remote locations. Trade finance platforms like Triterras’ Kratos uses blockchain technology to improve reliability and transparency in global trade and finance, addressing the historic lack of transparency and constant possibility of fraud.May 3, 2023 at 1:24 pm #2280Diparna BiswasParticipant
Supply chain finance (SCF) is important for connecting buyers and suppliers with financing institutions to reduce financing costs, improve cash flow efficiency, and reduce risks. SCF helps promote global import and export activities by adding flexibility and protection to commercial transactions. PO financing and invoice financing solutions are the most common products used in SCF. Buyers and suppliers are the typical players in SCF, and the buyer’s involvement adds weight to evaluating the supplier’s credit limit. SCF benefits both buyers and suppliers by improving their cash flow management and helps strengthen their business relationship. The financial institution is responsible for due diligence and KYC procedures to minimise risks and charges a commission and fee based on the transaction amount to oversee the financing process.
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