Supply chain finance has been at the top of the agenda at The International Chamber of Commerce (ICC), ever since it agreed on the first set of standardised definitions in October. Supply chain finance (SCF) has become popular with SMEs looking to manage their working capital, but its definition has become murky as service providers come up new names for solutions both new and old.
Supply chain finance can be summarised as any financial solution that can be used by a corporate to optimise working capital, and to minimise the operational costs and risks associated with supply chain processes.
The ICC draft definition includes well-known solutions such as invoice discounting, but also includes newer forms of financing that SMEs might be unfamiliar with, such as pre-shipment financing and Bank Payment Obligation.
Pre-shipment financing, also known as purchase order financing, is typically only offered by a few banks like Standard Chartered. They offer financing on the back of agreed purchase orders, instead of approved invoices. The rationale is that the supply chain starts when the purchase order is agreed, which is when SMEs often need funding to buy raw materials. It is a limited option and incurs higher fees for suppliers, but is increasingly in demand.
Pre-shipment financing could really take off if the new Bank Payment Obligation (BPO) becomes the industry standard. BPO is an electronic payment method for buyers and suppliers to secure and finance their trade transactions, allowing banks to work more closely with its correspondent banks, typically small local banks, to offer supply chain financing to their customers. It was introduced last year by the ICC and payment messaging services provider, SWIFT, and is particularly relevant for cross-border trade.
The idea behind BPO is that buyers and sellers’ banks will work more closely together to implement supply chain finance solutions for customers, and removes the paper trail and manual processing associated with letters of credit.
The final ICC definition is expected to be announced in January 2016.
Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter @FarahKhalique