Just-in-time Financing

Companies in every sector of business have long known that holding inventory costs money, and many have developed practices to streamline value chains and keep inventory to a minimum. Now, they are trying to apply a similar mindset to their financial management and the result is that banks are taking a new look at the trade financing services they provide to corporate clients.

Supply chain finance (SCF), as these services have come to be called, incorporates a number of different tools and financial products. The analogy with ‘just-in-time’ inventory management is actually very close. Technology improvements, such as the internet, have led to the world becoming a more trustworthy place. The traditional trade finance business involving letters of credit (LCs) and collections is just too time consuming and slow – a paper business – and costs clients lots of money.

But the world is also getting more complex. If, as a business, you operate a vendor-managed inventory system with one or more of your suppliers, with replenishments being called for in small quantities as and when they are needed, how do you handle payment for those goods? If you have outsourced large parts of your value chain to offshore companies, at what point does payment become due? Companies are looking to cut the cost of financing their business and some are going to banks and saying: “Give me an electronic system and you can have all of my trade business.”

For the banks, this is a big opportunity and it’s also a challenge. Specifically, what the banks are looking at doing is trying to regain the market they have lost in traditional trade finance business by providing cash on demand to clients at a competitive rate. They are trying to put suppliers and buyers in touch with each other and allowing them to trade and settle in a way that suits their needs, not the needs of the financial institution. It is a buyer-centred process, where the banks genuinely operate in support of their clients’ needs.

Banks are going to need a packaged solution that can process letters of credit, collections and guarantees, as well as an element of factoring, which has in the past largely been left to specialist firms. And the technology platform needs to support a web portal, so that clients can see where their transactions are at any one time – this is essential if companies are to remove the latency from their financial management and achieve true just-in-time financing. They don’t want to be paying for short-term overdrafts when they have the possibility to balance more accurately their incomings and outgoings. That’s the essence of SCF.

SCF is a holistic process by its very nature. From a bank’s point of view this means an integrated system is necessary to support it, as it will allow them to see far more than with traditional systems and they can take a view of all their customer accounts and positions at any one time, which is essential if SCF is to succeed.

Banks are being sold technology solutions that claim to be SCF systems, but very few of them really deliver what they promise. They have many components, but they still generally require judicial amounts of consulting services to make them work. What these banks need is a highly componentised system that delivers the support needed to offer SCF, with linkage between buyer and seller and perspective views of the supply chain.

System openness is also another vital ingredient to successful supply chain financing, which offers the ability to integrate the core platform with other interfacing systems as required. Today, banks operate in a market that offers the most advanced and sophisticated core banking solutions there has ever been, which means that by investing in these modern platforms, banks are actually realising that they can do most of what they want in respect of SCF. This removes the need to buy another system to put on top because it can all be done from the one central platform. Which is very appropriate – saving money for clients is, after all, the essence of what SCF is all about.

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