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A Brief Study about Supply Chain Finance

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Hajar Alawi , Mohammed Abdul Imran Khan
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A Brief Study about Supply Chain Finance

Hajar Alawi a* and Mohammed Abdul Imran Khan a
DOI: 10.9734/bpi/niebm/v8/2051B

ABSTRACT

In this chapter, one aspect will be covered: Supply Chain Finance, which is how money flows back, to
the suppliers. Generally, supply chain finance is when firms (buyers) pay their invoices to the
suppliers (sellers) through a financer/funder (bank or any financial institution). The chapter is a much-
needed summary of Supply Chain Finance and its increasing importance. Focusing on Supply Chain
Finance, the chapter also draws attention to the development of Supply Chain Finance; its history,
advantages, and disadvantages. The objective of this study is to provide learners with a basic
understanding of Supply Chain Finance, its concept, benefits, advantages, disadvantages, and how it
works. The chapter concludes by analyzing the future prospects of Supply Chain Finance.

Keywords: Suppliers; supply chain; supply chain finance; financer, bank.

1. INTRODUCTION, HISTORY AND DEVELOPMENT OF SCF

For all businesses and firms around the world, there are networks of the supply chain that connect
them starting with their suppliers and then distributers/ retailers to deliver products and services to
customers [1]. It includes planning, management, financing, and many other processes and
operations. Supply chain finance was born around 1980 as a potential innovative financing option for
firms and their suppliers. It started mainly as a trade solution to finance working capital and evolved
into supply chain finance years later in Europe and US. In 1990 the automotive sector was one of the
first industries to implement SCF then later it spread to the retail industry. But its origin roots go back
thousands of years to trade finance which is as old as trade itself by using a basic form of invoice
discounting and selling promissory notes on a secondary market at discount. Now, at present SCF is
a large and growing industry. In 2015, a McKinsey report suggested that SCF had a potential global
revenue pool of $20 billion, while a 2017 ICC survey of banks in 98 different countries identified
supply chain finance as the most important area for development and strategic focus in the coming 12
months [2]. It is implemented in various industries by leading firms all around the world and the last
crisis (pandemic) has confirmed its benefit such as working capital finance solutions managed by
independent financial institution platforms [3].

Source: https://icc.academy/supply-chain-finance-an-introductory-guide/ [4]

_____________________________________________________________________________________________________
a
Dhofar University, Sultanate of Oman.
*Corresponding author: E-mail: mimran@du.edu.om;
 New Innovations in Economics, Business and Management Vol. 8
A Brief Study about Supply Chain Finance

2. CONCEPTS OF SCF

Supply chain finance is the set of practices and workflows used by banks and other financial
institutions to manage money flow while reducing the risk where possible and enabling both buyers
and suppliers to optimize their working capital by providing short-term credit [5]. It is also known as
buyer-side finance as it is commonly used to cover supplier financing for firms. It is a set of solutions
that optimizes cash flow by allowing firms to extend their payment terms to their suppliers while
providing the option to get paid early by the separate parties as mutual assistance for both so it is not
considered a loan [6]. It is also called reverse factoring because unlike the factoring technique which
is initiated by the supplier (seller) and directed only towards its objectives, the SCF is initiated by the
buyer (firm) to fulfill the objectives of both the buyer and the seller (supplier) [7]. The SCF works best
when the firm (buyer) has a better credit rating than the supplier and if it does not have good
credibility, the financier/funder may refuse to fund the supplier in advance [8]. The SCF benefits all
three parties involved sellers, buyers, and the financial institution as the last one effectively accepts
the payment risk for the other two in exchange for a fee that it receives upon payment of the full
amount [9].

3. HOW DOES SCF WORK

A firm (the buyer) already agreed with a financer/funder (traditionally a bank or other financial
institution) to cover the amounts that it owes to its suppliers then [10]:

1. The firm places an order for goods/products/materials with a supplier.

2. The supplier sends the invoice to the firm that passes it to the financial institution /funder for
approval and immediate payment.
3. The funder will confirm and issue a transaction statement to the firm.
4. The funder pays the supplier the invoice upon receipt at a predetermined agreed discount rate.
5. The firm pays the funder at the time specified in their agreement full amount.

For example, the buyer, firm ABC purchases goods from the seller, Supplier XYZ. Under traditional
circumstances, Supplier XYZ ships the goods and then submit an invoice to firm ABC, which
approves the payment on standard credit terms of 30 days. But if Supplier XYZ is extremely needed
of the cash, it may request immediate payment, at a discount, from firm ABC's financial institution. If
this is granted, that financial institution issues payment to Supplier XYZ, and in turn, extends the
payment period for firm ABC, for an additional further 30 days, for a total credit term of 60 days, rather
than the 30 days mandated by Supplier XYZ.

4. ADVANTAGES & BENEFITS OF SCF

 It is a mutual advantage (win-win situation) for both the seller (supplier) and the buyer (firm) by
extending the credit line as well as getting the funds available to the supplier [11]
 It optimizes working capital for both supplier and firm.
 It improves the relationship between firm and supplier and paves the way for future trades

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 New Innovations in Economics, Business and Management Vol. 8
A Brief Study about Supply Chain Finance

 Improves the creditworthiness of the firm and gives the liquidity (cash flow) advantage to the
supplier
 Unlike the involvement of the banks who charge a higher rate, the financing cost in the case of
supply chain finance is relatively small
 It improves supply chain health by reducing the likelihood of future supply chain issues/risks
that could affect their operations.
 It is profitable for the funder to get the full amount from the firm while paying the supplier at a
discount

5. DISADVANTAGES AND RISKS OF SCF

 The financier could not be a bank so, there is an element of risk in dealing with a third party.
 Problems with transparency such as it can be used as a tool to cover payments for suspicious
goods or poor disclosures hiding financial distress [12,13].
 It can only be used to finance finished goods which have a readily available market value.
 It can be for a very limited number of suppliers for the firm.

6. FUTURE OF SCF

At present with fast-growing technology and businesses, market changes, and the development of
many systems and tools to analyze, manage and facilitate supply chain finance which is crossing
boundaries to be global, reaching all countries and including a huge number of firms, suppliers,
distributors, etc. with the effects of the pandemic recently, all are indicative that the future of SCF to
be digitalized using new technologies with new models and techniques of data sharing and well-
functioned communications between all parties which are challenging but It will be a huge success in
all aspects and levels [14]. It will achieve effective and efficient operations, lower costs, entering to
new markets, minimize risks, maximize returns, improve cash flow management, and strengthen
global supply chains [8]. It will grow rapidly with more resilience, and potential, and going to add more
value to businesses even small ones, which will be very helpful to many firms and organizations
around the world.

7. CONCLUSION

SCF is an essential way to facilitate trades and businesses between firms and their suppliers and
sellers, which is profitable for all involved parties. It is going to be a bright promising future for all sizes
of firms to have many opportunities to grow, compete and prosper.

COMPETING INTERESTS

Authors have declared that no competing interests exist.

REFERENCES

1. Hofmann E. Supply chain finance: some conceptual insights. Beiträge Zu Beschaffung Und
Logistik. 2005;16:203-14.
2. The International Chamber of Commerce Banking Commission. The International Chamber of
Commerce. Retrieved from The International Chamber of Commerce Banking Commission;
2017.
Available:https://iccwbo.org/media-wall/news-speeches/icc-banking-commission-launches-
questionnaire-2017-global-survey-trade-finance/
3. Available:https://www.marcopolonetwork.com/resources/infographic-the-history-of-supply-chain-
finance/
4. Available:https://icc.academy/supply-chain-finance-an-introductory-guide/
5. Pfohl HC, Gomm M. Supply chain finance: optimizing financial flows in supply chains. Logistics
research. 2009;1(3):149-61.

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A Brief Study about Supply Chain Finance

6. Available:https://www.investopedia.com/terms/s/supply-chain-finance.asp
7. Available:https://primerevenue.com/what-is-supply-chain-finance/
8. Lipan Feng, Kannan Govindan, Chunfa Li. Strategic planning: Design and coordination for dual-
recycling channel reverse supply chain considering consumer behavior. European Journal of
Operational Research. 2017;260(2):601-612.
ISSN 0377-2217
Available:https://doi.org/10.1016/j.ejor.2016.12.050.
9. Available:https://planergy.com/blog/supply-chain-finance/
10. Available:https://www.tradefinanceglobal.com/posts/video-woa-insights-tony-brown-on-the-
physical-supply-chain-meeting-the-financial-supply-chain/
11. Available:https://tiekinetix.com/en/blog/pros-cons-dynamic-discounting-vs-supply-chain-finance
12. Available:https://www.gtreview.com/supplements/gtr-scf-2021/bright-future-supply-chain-
finance/
13. Available:https://www.gartner.com/smarterwithgartner/benefits-and-risks-of-supply-chain-
finance-for-cfos
14. Available:https://www.wallstreetmojo.com/supply-chain-finance/

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Biography of author(s)

Hajar Alawi
Dhofar University, Sultanate of Oman.

Hajar Alawi is a research scholar pursuing her Master’s in Business Administration at Dhofar University. She is basically a
Senior Electrical Engineer with 8 years of working experience in a government institution.

Mohammed Abdul Imran Khan

Dhofar University, Sultanate of Oman.

He is a Doctorate in Finance is currently working with Dhofar University as a Professor (Asst) of Finance. He is TEACHING
passionately for the last 18 years to Master’s & Bachelor’s Program in Business for majors like Finance & Entrepreneurship. He
has been serving as editor/reviewer of many international journals and is an appointed external evaluator for PhD and M. Phil
thesis of Universities in Asia. He has authored 01 Textbook titled “Basic Finance”. He has published 63 research articles in
journals of repute and the majority of his publications are indexed with Scopus. He is on the editorial board of journals and has
reviewed many articles in the area of finance and entrepreneurship. He has actively contributed to conferences worldwide as a
reviewer, speaker and presenter. He has been showing keen interest in working on projects granted by The Research Council
of Oman. Recently he has submitted three grant applications. he has been teaching to Post Graduate and Undergraduate
students for the last 18 years. Before joining Dhofar University, he taught 10 years in India to Master of Business Administration
and worked on the administrative position as “Assistant Dean (Deputy Director)” of the College for a period of 5 years looking
after day-to-day administrative activities of the college.
_________________________________________________________________________________
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