The SCF market once excluded small suppliers – that is no longer the case

Business Reporter, February 2024

When it comes to payments, the relationship between buyers and suppliers has always been difficult. Suppliers want payment as quickly as possible so they can maintain cash flow. Buyers have, meanwhile, sought ways to extend the window on payments so that they do not need as much working capital for their business.

The arrival of supply chain finance (SCF) several decades ago meant a third party – a bank or another finance provider – would now pay a supplier’s invoice early, leaving the buyer to repay the bank at a later date.

It was a win-win for both parties, removing the risk of shortfall for suppliers while allowing buyers to operate their business with less capital. SCF helped to strengthen buyer-supplier relationships and ensure suppliers had the necessary funds to keep their operations going, even during periods of volatility.

As SCF grew into a $100 billion dollar industry, more and more providers entered the SCF markets.

But that soon became its own problem.

Matching a buyer with the right SCF provider

SCF providers face an immediate issue in onboarding clients: namely, they are external parties who don’t know certain key characteristics or current projects of the entities they are dealing with. These could be cash flow targets or procurement organisation, or current IT projects competing for resources, as well as the location of a buyer’s suppliers.

What’s more, different SCF providers are suited to different clients, and that means a buyer must know which provider is best for them – for instance, that they have a strong track record of working with companies of a similar size in certain geographies.

Additionally, if the market in which a buyer operates is inherently unstable, they will want a provider whose solution incorporates predictive analytics and other tools to minimise uncertainty at the supply end. If, on the other hand, an entity is operating across multiple jurisdictions, the provider will need to accommodate the difficulties that come with cross-border payments and foreign currencies.

A final challenge is for small suppliers. They have long struggled to access SCF, meaning that they are pushed to the edges while buyers opt for medium- and large-sized ones.

The market has been waiting for an SCF provider that not only has the optionality required to meet the many needs of parties involved in supply chain transactions, but also one that would finance small suppliers.

The Express SCF revolution is underway

As part of its mission to make SCF inclusive to all parties, Orbian has developed a solution to ensure buyers feel confident working with small suppliers. Orbian is the only SCF provider to offer Express SCF – a type of financing specifically designed to be accessible to suppliers of all sizes in any jurisdiction.

“For the buyer, the challenge is to align its own shop, meaning aligning IT and accounting at the beginning of the programme, as well as treasury and procurement, and ensure they are aligned for the lifetime of the programme,” says Markus Schiffers, Managing Director at Orbian.

To ensure those alignments, Orbian appoints to each programme a programme manager with extensive experience in supply chain financing, while advising the buyer to choose a single point of contact. This enables fast and effective communication.

It then appoints a special-purpose company to contract with multiple banks and raise capital in a secure way. A trustee and backup service provider monitors and authorises any cash movements of the special purpose company, thereby adding an extra layer of safety.

Orbian consults closely with a buyer to understand their needs and objectives, who their suppliers are and what the relationship between buyer and supplier is like.

“We then allocate the right tools that are most effective and efficient for those different suppliers’ populations that exist with every buyer,” says Schiffers.

Opening up new jurisdictions to SCF

Orbian uses two mechanisms to level the playing field. The first is reverse factoring – the traditional way of going about SCF. Reverse factoring is when a provider buys a receivable from the supplier before it becomes due.

This is reliant on a factoring agreement between provider and supplier. But because such agreements are closely regulated in many jurisdictions, there are limits on how widely reverse factoring can be used. Only around 50 countries allow it.

Express SCF, however, doesn’t involve buying receivables. Instead, it uses an Orbian entity known as Orbian Card Services Ltd, which performs early payments to suppliers using e-cards, and isn’t bound by the same rules. This means Express SCF can be used in 150 jurisdictions.

Major companies have come to Orbian dissatisfied with their supplier onboarding process and seeking alternatives. A leading global  manufacturer of electric motors had 108 suppliers across eight countries and had been using reverse factoring with a bank, but needed a solution that would allow it to take on more suppliers in many different jurisdictions.

So Orbian implemented Express SCF, and just over a year later, hundreds of suppliers across 20 countries were working with the company.

Orbian is democratising the market

In making onboarding easier and in enabling SCF to be used by suppliers big and small across a much wider geography than even before, Orbian has helped to democratise the SCF market.

“Supply chain finance is a great tool and when applied correctly, it allows buyers and suppliers to benefit tremendously,” Schiffers says.

For so long, the flexibility needed to make finance accessible to all was lacking. That is no longer the case.

View the original article here.

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