Global Supply Chain Finance has made deep inroads in various parts of the world as a preferred method of funding international buyers and suppliers. The benefits that global supply chain finance offers over conventional methods of supply chain funding have been discussed in articles before (Supply Chain Finance article). Here, we aim to look at how Supply Chain Financing is being used internationally by market leaders to a similar effect.
Global Supply Chain Finance – How it works.
For the purpose of explaining an international trade finance transaction, we proceed with the creation of a fictional tractor company. This company is based out of the United States and sells tractors both locally and exports globally to Africa. The company is supported by a large multinational bank which has a presence both in the US and Africa.
The tractor company decides it wants to start selling tractors in Nigeria. Now, it can either go through the long process of registering in Nigeria and getting the required licenses and sending its people over, or it can just tie up with a local distributor in Nigeria. Since the initial transaction volumes are expected to be low, the company decides to tie up with a local dealer and use their market presence and knowledge to its advantage.
The company now has to fund its Nigerian distributor to buy tractors and start selling them locally. The company might eventually decide to have multiple distributors in Nigeria and eventually plans to cover other African nations. So instead of going through the long drawn process of securing funding for each of them individually, it can simply ask the bank for help.
The bank can offer a cross-border Global Supply Chain Finance solution. The solution may be structured somewhat like this:
- The Bank will fund a total outstanding of USD $100 million
- Each African distributor may get a maximum limit of USD $1 million. This limit may only be used for buying from the tractor company.
- The credit period extended would be 180 days to each distributor, and he has to repay within that time
- The tractor company must inspect and certify that the distributor has sufficient infrastructure, market experience, and manpower
- The bank will perform the necessary KYC and creditworthiness checks, and these must be passed by the distributor. – Here is where the Vendor Portal comes in and the ability to flex your processes to collect information on the suppliers.
Based on these broad and other specific criteria, the bank has created a structure whereby they can fund as many as 100 distributors across the continent of Africa with minimal intervention from the tractor company. The bank gets 100 new customers, the distributors get cheap funding, and the tractor company is now well established on the continent.
Other Considerations and Conclusion
It is not unusual for businesses to ask banks for even more support. Continuing the above example, let’s say a French automobile company now wants to set up distribution in Africa. It approaches the same multinational bank which now has 100 trusted clients (the tractor distributors) in Africa which it knows well. The bank can then introduce these distributors to the French company and vouch for their market presence, financial track record, etc. Some of them might be able to start now an automobile distribution business as well, and the bank would be more than happy to fund them.
This is just a small example of a potential Global Supply Chain Finance setup. There are other variations, including on the vendor side. Here, we did see some global Supply Chain Finance benefits such as easier funding, quick set up time, leveraging the bank’s relationships and so on. However, there are many more features and advantages of Supply Chain Finance which have made it a very popular product for both buyers and sellers. The potential new clientele that it offers to banks has also made them focus on the product with increasing vigor. This can usher in new product innovations, efficiency and cost reductions.