Supply Chain Finance

Supply Chain Finance (SCF) is the use of special financial techniques that can speed payments to suppliers, enable the financing of inventory, and extend payment terms to customers. The techniques require special types of short-term bank financed loans and advances, that are automated using special inter-bank secure payment mechanisms. The key techniques are the following:

• A loan or advance against receivables – financing made available to a party involved in a supply chain with the expectation of repayment from funds generated from current or future trade receivables.
• Distributor finance – financing made available to a distributor of a large manufacturer to cover the holding of goods for re-sale. Typically, this provides liquidity for the manufacturer until goods are sold to a retailer or end-customer.
• Loan or advance against inventory – financing provided to a buyer or seller for the holding or warehousing of goods. The finance provider usually can claim the inventory if needed.
• Pre-shipment finance – loan provided to a seller for the sourcing, manufacturing or conversion of raw materials or semi-finished goods into finished goods and/or services which are then delivered to a buyer.

Recently, the practice has drawn scrutiny from the Security and Exchange Commission believing that Investors should have greater clarity on companies’ so-called supply-chain finance programs.

Definition: Supply-chain finance is essentially a form of short-term borrowing to pay for goods and services. The funding, often provided by banks, pays a company’s suppliers earlier than they would normally be paid, at a slight discount. The company then pays the bank later, allowing the company to hang on to cash longer.

Financial institutions that offer such funding include Citigroup Inc., Greensill Capital and HSBC Holdings PLC. Coca-Cola Co. and Boeing Co. and many other blue-chip companies make use of the financing.

The tool has attracted scrutiny from the U.S. Securities and Exchange Commission, ratings firms and market participants, some of whom say it allows companies to portray overly optimistic financial health. The SEC in recent months has asked some large companies to provide more details about their supply-chain finance programs.

WSJ: October 23, 2020, print edition as ‘Watchdog Eyes Loans For Supply Chains.’ Other sources also used.