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Supply chain finance a working capital solution for SMEs

Released at: 14:06, 20/09/2017

Supply chain finance a working capital solution for SMEs

Ms. Nguyen Khanh Duong (R). Photo: Citi

Ms. Nguyen Khanh Duong, Trade Product Head at Citi Vietnam and a panelist at the APEC SME Finance Forum, tells VET about supply chain finance services.

As a relatively new concept in Vietnam, can you explain what supply chain finance is?

The use of supply chain finance has dramatically increased over the last five years. Driven by a range of pressures (unsettled macroeconomic and financial environments), corporates must increasingly source and sell globally. Working capital has become more and more crucial to the development of small and medium-sized enterprises (SMEs). In order to support their supply chains and potentially lower costs, many multinational corporates have turned to supply chain finance.

Supply chain finance is a partnership solution between the buyer (typically multinationals) and a bank, allowing suppliers (typically SMEs) to enter into a program to sell their receivables to the bank in respect of goods and services delivered to and accepted by the buyer.

This financial structure will rely on payment risk for the buyer to finance suppliers at an advantageous rate. This is an ideal solution that leads to twin advantages: it reduces the average day sales outstanding (DSO) of the supplier, and increases the day pay outstanding (DPO) of the buyer. This benefit is obtained when the pure commercial transaction of physical supply chains is linked to an innovative solution in working capital management, which is typical of supply chain finance.

Supply chain finance is a win-win solution for all parties. What are the benefits for SME suppliers from participating in electronic supply chain finance?

It is clear that buyers and suppliers often have conflicting objectives in negotiations over commercial terms, with a common goal being to strengthen their relationship. Putting in place a supply chain finance solution will lead to mutually beneficial outcomes that can achieve meaningful improvements for both buyers and suppliers.

On the SME suppliers’ side, they benefit specifically from accelerated cash flows, since receivables are converted into funds more quickly. In addition, suppliers also have access to alternative financing options for even greater access to working capital. It also helps to lower borrowing costs for improved financial health, freeing up funds for critical business activities and helping suppliers improve their overall financial performance.

On the buyers’ side, the solution helps well-established buyers support their key suppliers’ working capital needs while also realizing an uninterrupted supply flow, strengthening relationships with valued suppliers.

The electronic supply chain financing solution is popular in many markets and regions like the US and Europe, but is a relatively new concept for SMEs in Vietnam. Buyers and sellers can experience seamless financing without paper, which was uncommon a few years ago for “financing transactions”. It helps simplify administration processes, reduces costs, frees up resources to focus on core competencies, and securely executes transactions.

What experience does Citi possess as a market player in deploying supply chain finance via electronic platforms?

Citi is a market leader in supplier finance globally. Today, it has more than 2,300 buyer programs in 100 countries. Citi is proud to be one of the very first banks in the market offering the supplier finance solution to corporates and their suppliers. In 2014, it deployed its supply chain finance solution via electronic platforms (web-based systems) to support the financing of commercial transactions through the purchase of trade account receivables.

By having the platform in place, buyers and their suppliers can have flawless access to the system to transact supplier finance activities. Buyers can go to the platform to upload accepted invoices for their respective suppliers. Simultaneously, suppliers have the visibility of invoices accepted by the buyer and are therefore able to apply financing easily and conveniently. This electronic solution is highly welcomed and appreciated by buyers and their many suppliers joining Citi’s supplier finance program, as it eliminates the requirement for sending physical documents (for example invoices) and improves the transparency and visibility of accepted payables and discounted information.

As global supply chains stretch around the globe with multinational buyers on one side and a diverse group of suppliers in numerous countries on the other, what are the challenges in promoting cross-border supply chain finance?

More and more Vietnamese SMEs are participating in the supply chains of multinational companies. That means working capital needs on cross-border flows will increase accordingly. The question raised during the APEC SME Forum is how to support Vietnam’s SMEs to penetrate the global value chain more efficiently. There are inherent challenges that SMEs face in stepping further into cross-border supply chain finance. An evolving regulatory framework on supply chain finance (as part of factoring services) is an example.

Vietnam’s regulations still contain certain limitations that, to some extent, may prohibit SMEs from gaining full access to a cross-border supply chain solution. Further, raising the bar in SMEs’ understanding of the supply chain finance concept and its critical benefits for the company’s working capital management is seen as another challenge in promoting cross-border supply chain finance. These challenges can be overcome with the support and participation of market players, buyers, sellers, and even regulators.

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