Supply chain finance (SCF) has become increasingly common among large businesses and their cash-flow-starved suppliers as a way to boost working capital. In fact, according to a 2020 Gartner poll, roughly 23 percent of respondents said their company relied on supply chain finance to bolster cash flow and provide some stability in the pandemic-driven economy.
Several factors are driving the popularity of SCF, from the COVID-19 pandemic to emergence of sophisticated fintech solutions, to a push to make the most of working capital by both buyers and sellers, to legislative and regulatory agendas that proposed to tighten payment windows for suppliers.
For whatever reason a company decides to pursue an SCF program, they are left with a bevy of choices as to the specific type of solution(s) – both traditional and software platform led that can best meet the needs of their business.
To that end, here are the top-eight things companies should be looking for when choosing an effective, modern supply chain finance solution to improve their working capital position:
Provides a Comprehensive End-to-End Solution
A broad range of supply chain finance providers coexist, each catering to different needs, but few offer a comprehensive solution that caters to the needs of various industries and a full range of sellers. The working capital needs of companies are constantly evolving and having a solution that can facilitate multiple functions like factoring, reverse factoring, and dynamic discounting can improve efficiency and speed of payment when compared to fragmented and manual solutions.
Offers Diverse Funding Sources
A solution with diverse funding sources allows buyers the flexibility to structure a program that best fits their working capital needs. With a multi-funder network, companies can draw upon the balance sheets of bank and other financial institution partners, the buyer (dynamic discounting programs) and the SaaS company itself – or a combination thereof. For example, a business could use its own funds for certain suppliers or up to a fixed amount, then use third-party funds for greater cash flow needs. Diverse funding sources also allow for greater flexibility relating to fees sellers incur for participating in a SCF program.
Analyzes Credit Risk
Risk is always a consideration of any type of financing arrangement; supply chain finance is no exception. When looking for an SCF solution, it is important to look for functionality that taps into analytics that assess factors like:
- Invoice Details,
- Seasonal Trends,
- Disputes and Discounts,
- Skipped Invoices,
- Supplier Concentrations,
- DSO and DPO Benchmarking, and
- Supplier-Buyer Relationships.
These analytics can help make predictions about:
- Days to Pay,
- Dilution, and
Most banks do not analyze this type of risk and platform providers have no incentive to do so because they do not draw funds from their own balance sheet. With 25 years of experience analyzing risk and the ability to use our own balance sheet, LSQ has the knowhow and motivation to provide this type of in-depth risk analysis.
Provides Insightful Reports
As supply chain financing has become a more common payment arrangement for businesses globally, the practice is coming under increased regulatory scrutiny as both governments and investors attempt to ascertain risks and potential long-term impacts. This leaves companies grappling with the issue of how to properly report supply chain financing arrangements on financial disclosures.
When looking for a solution, it is important to look for one that provides in-depth analytics, reporting, and customer credit monitoring that give detailed information and insights that can easily give investors and regulators a deeper view into a company’s true financial position.
Important reporting metrics include:
- Spend count by number of suppliers, invoices, POs by region, business unit, payment term, currency, and payment method;
- Spend amount over time by region, business unit, category, supplier, payment term, currency, and payment method;
- Supplier concentration; and
- Payment behavior, including approval days, payment terms, and performance.
Supports Diversity, Equity, and Inclusion
Supplier diversity is an element of supply chain planning that is becoming increasingly important to private companies, government agencies, and nonprofits. Supplier diversity means building a strong commitment to creating and maintaining a supply chain that ensures the inclusion of diverse groups in procurement plans, including, women-, minority-, LBGTQ-, and veteran-owned businesses.
When looking at SCF solutions, asking about the company’s support of DEI initiatives is critically important because diverse supply chains promote company growth, a wider supplier pool, a better understanding of your customer base, and improved talent recruitment and retention, as well as drives innovation.
Keeps Your Data Secure and Compliant
Unfortunately, data security is a constant worry for companies worldwide. This problem has grown exponentially more difficult for IT departments to solve for with the shift to unexpected work-from-home arrangements forced by COVID-19 shutdowns that led to an increase in ransomware and data theft. Just as pressing of an issue as security breaches is regulatory compliance. As with any financial services or technology company, SCF platform providers face an extra heightened degree of scrutiny.
When looking for a solution, it is important to look for a number of built-in features to help protect your data, both at rest and in flight, and keep on the right side of regulations. Critical features include:
Designed for Fast Implementation and Ease of Use
If a solution is not intuitive, is cumbersome to use, or difficult to set up and get started for both buyers and sellers, there is a high probability that any program using that platform will fail due to lack of use. A successful solution allows for:
- Simple Implementation: Caters to varying technological sophistication with no-code downloadable templates, SFTP connections for larger volume invoice uploads, third-party integrations, and data sharing with AP and ERP systems.
- Rapid and Easy Onboarding: Ability to have you online in a few days, allowing invoices to be added to the system for faster payment. Invite sellers through a process that eliminates stress and paperwork.
- Intuitive Interface: Eliminates the complexity of working-capital management with a UX that delivers clarity and transparency.
Seller Onboarding and Management
An SCF program is only successful when sellers come on board and actively participate. When deciding on a solution, it is important to consider how that solution supports supplier adoption and use. A partner provider can help you segment, price, and educate your sellers to ensure the widest adoption possible. Once aboard, the right supply chain finance solution will provide real-time support in case sellers have an issue and provide them with other funding options (like AR financing) if they have more working capital needs.
SCF has proven to be a valuable tool for buyers and sellers of all sizes in a multitude of industries to boost their liquidity and overall financial health. While every company has its own unique needs and goals for an SCF program, by being thoughtful about implementation and making sure a solution checks the important boxes and can scale as your business grows, you can ensure a better chance of success in meeting your working capital requirements.
To learn more about our supply chain finance solutions, visit lsq.com/platform/supply-chain-finance/.