Digitalisation and a growing interest in supply chain resilience have been highlighted as key enablers when it comes to the growing adoption of supply chain finance (SCF) programmes.
Speaking during a live broadcast organised by MEED and Mashreq, senior finance experts highlighted that while SCF has been around for a long time, a shift in priorities has prompted corporates to look for broader solutions to alleviate working capital issues and improve cashflow.
Watch the on-demand webinar here
“The evolution of technology during the pandemic helped propel supply chain finance further,” says Victor Penna, co-head of Global Transaction Banking at Mashreq Bank, citing the example of fintechs’ rising popularity in the Middle East.
“The change – wider adoption of SCF – is here to stay. But not because of the pandemic or any disruption, but because buyers are keener to support and protect their suppliers and ensure a resilient supply chain.”
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SCF, historically more commonly known as reverse factoring, refers to a solution where a buyer approves a supplier’s invoice for financing from a third party, for example a bank, allowing the supplier to get paid more quickly than they would otherwise.
From a procurement perspective, SCF provides buyers with an opportunity to finance preferred suppliers on favourable terms, thus increasing the latter’s business resilience and overall health. This is especially relevant in economies such as the UAE, where a vast majority of suppliers tend to be small and medium-sized enterprises (SMEs).
Conversely, from a supplier perspective, SCF allows a reduction in receivables risks of buyers and the ability to remain financially viable.
The wider adoption of SCF is here to stay. Not because of the pandemic or any disruption, but because buyers are keener to support and protect their suppliers and ensure a resilient supply chain
Victor Penna, Mashreq Bank
“Supply chain finance is especially relevant in the current macroeconomic scenario,” says Penna. “From supply chain bottlenecks and the Russia-Ukraine war, through to greater focus on near-shoring and a stringent need to cut costs – all of this impacts the supplier and its access to working capital.”
“Managing your suppliers and ensuring the financial health of your supply chain is essential for working capital efficiency,” explains Reda Ezzat, SVP – head of Trade & Structured Finance at Mashreq Bank.
“Supply chain finance benefits both the buyer and supplier,” he says. “The buyers get access to a wider supplier base, across different jurisdictions. It is further a great tool to negotiate payment terms, and the better your payment terms, the better your cash conversion cycles.”
Cash conversion cycle refers to the time it takes for a firm to convert its raw materials into cash. The shorter these cycles, the greater the liquidity a firm holds.
“In markets where suppliers are not financially resilient, due to low liquidity or high interest rates, buyers can extend their support and in turn increase the strength of the entire supply chain,” says Reda.
Managing your suppliers and ensuring the financial health of your supply chain is essential for working capital efficiency
Reda Ezzat, Mashreq Bank
Room to grow
Reda emphasises the need to think of SCF beyond a financing solution and instead, keep the holistic value proposition and strategic benefits in mind.
“Buyers need to work with their relationship and trade finance managers to figure out the benefits,” he says. “This could be inculcating sustainability in the supply chain, supporting SMEs or securing working capital.”
Equally crucial, says Reda, is to understand that adopting the programme is not the sole responsibility of a treasurer alone. A procurement manager is key in supporting such initiatives.
“And a major step in the right direction is is the shift from manual to digital,” says Reda. “Supply chain finance works best on a platform where you can easily onboard even hundreds of suppliers. A digital platform allows you to track everything. And capabilities can be further enhanced if it’s integrated with a buyer’s ERP system.”
For a lender, SCF is like any other form of financing, says Reda.
“It’s about our relationship with our client – the buyers. Over time, it helps us form a relationship with the suppliers as well.”
Reda notes that commercial banks are not just about making money and that they have an obligation to support the economy.
“Supply chain finance is an excellent tool for commercial banks to support SMEs indirectly, through the buyers,” he says. “We can’t always directly help SMEs due to limitations or restrictions, but through such tools we can. It is our obligation.”
Watch the on-demand webinar here
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