Supply chain finance – untapped opportunities for SMEs


Abu Dhabi 25 January 2017

Small businesses can optimise the management of their working capital and cash, via supply chain finance solutions that are now offered in the market to their larger clients.

SMEs and MMEs (Mid-Market Enterprises) form an important component of large corporates’ physical supply chain. The businesses that fall under this category toil endlessly with the aim of providing uninterrupted supplies of critical goods and services (raw materials) to their larger clients. This allows the latter to convert/consolidate massive amount of supplies into finished goods and deliver them to the mass population in a timely manner. Maintaining a strong and healthy supply chain is critical for any corporate because any disruption here will result in unnecessary delays and costs. In order to keep the physical supply chain healthy, it is important that the financial needs of the companies that are part of this chain are handled promptly and efficiently.

SMEs’ typical challenges
Let’s take a closer look at some common challenges that companies typically face in this context.

  • Negotiating a trade commercially can often be a win-lose proposition, especially if the negotiations revolve around financial considerations. Generally, the SME/MME ends up being on the receiving end and is therefore either left feeling the brunt or having to find its own way to manage business within the negotiated commercial terms.
  • Liquidity attracts liquidity. As compared to the SME/MME segment, large corporates have little problems in raising fresh liquidity in the market. Ironically, SMEs and MMEs are generally the ones that need to be kept liquid to ensure a healthy supply chain.
  • Banks and financial institutions have had a tough experience in the last few years during the financial crisis, which resulted in tighter regulations. Banks are now urged to follow stricter Know-your-client (KYC) requirements, stringent lending policies, improved pricing return hurdles, etc. This has made credit scarcer. Here again it’s the SMEs that end up being on the losing side of the financial negotiations.

Solutions for growth
So are there any solutions that can create a win-win situation both for large corporates and SME players? Absolutely. Here are a few suggestions of how banks, corporates and the SME/MME segment can create a mutually beneficial system of growth:

  • Banks need to ensure liquidity flows into the SME/MME segments without exposing themselves to undue risk on their own balance sheet;
  • Banks and large corporates need to collaborate and work together and piece the physical supply chain together with financial supply chain.

The significance of supply chain finance
Some banks today – including NBAD - have started offering large corporates what we call Supply Chain Finance (SCF) solutions. These solutions allow SME/MME suppliers to raise non-recourse finances against their receivables from the large corporate - typically at the large corporate sponsored lower interest rates. This helps suppliers generate liquidity at a lower financing rate, contributing to savings in their business. Corporates may ask for a share in the benefits of such reduced interest rates, however the overall deal should still work in favour of the supplier’s business.

This enables a win-win solution for both corporates and their suppliers for the following reasons:

  • SCF allows financing of domestic and cross border post shipment commercial transactions;
  • The buyer would buy goods/services in the normal course of their business from various suppliers giving them commercial payment terms;
  • This generates Accounts Receivables (A/R) in supplier’s books;
  • When using SCF as a tool, the buyer allows suppliers to sell the A/R for early cash to the bank , typically at buyer sponsored interest rate;
  • Buyer pays the bank on the commercially agreed due date with the supplier

A solid SCF solution with a high-level of automation streamlines the end-to-end process, making the entire experience hassle free for its users. The web-based platform is then fully secure and allows buyers and suppliers to undertake transactions by following a few simple instructions. For the buyer: SCF improves working capital and liquidity, fosters stable relationship with the supplier ensuring long-term partnerships and allows Off balance Sheet treatment (obligation should not qualify as Bank Debt). For the supplier: SCF infuses fresh liquidity, with a positive impact on cash flow, certainty of payment and a better understanding of the timeline and status of invoices, and provides additional source of financing without impacting existing credit limits.

The experience that a financial partner brings on board can help businesses unlock value from their supply chain and contribute to the creation of a flexible financing strategy. Partnerships of this kind create a rare win-win situation for the physical supply chain players and help the SME/MME segment concentrate on growing their business without worrying for burgeoning cost of debt or absence of liquidity.

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