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Benefits of Supply Chain Finance for Thai Companies

  • Article

Trade remains the bedrock of the global economy; despite prevailing recessionary concerns and the risks around deglobalisation. Key priorities amongst corporates in Asia (including Thailand) and around the world, would be to ensure resilience and adaptability in their supply chain where cost effective and efficiently managed trade networks are crucial to achieve commercial success in an uncertain environment. For these reasons organisations are looking to understand how supply chains have changed and what they need to prepare for the period ahead.

Within this article, we will explore supply chain finance and explain how it can benefit Thai companies.

What is Supply Chain Finance?

Broadly, Supply Chain Finance may refer to financing of trade activities throughout a supply chain. Supply Chain Finance is a working capital solution which provides a form of supplier financing premised on the potential credit arbitrage that may exist between the buyer and its suppliers. This proposition is ‘buyer-centric’ in that the buyer is HSBC's customer, who arranges a programme in favour of its suppliers that has the option of receiving the discounted value of an approved invoice prior to its actual due date. Supply Chain Finance is the accepted standard market name for this proposition however, synonyms that are widely used by customers and other banks would include Payables Finance, Reverse Factoring or Supplier Finance.

Supply Chain Finance Process: How does it work?

The key elements required for a Supply Chain Finance proposition are:

  • Buyer purchases from suppliers on open account with trade credit terms
  • Buyer identifies invoices for which they instruct HSBC to pay by the invoice due date premised on its irrevocable commitment to pay the approved invoice
  • HSBC makes early payment to suppliers on a fully non-recourse basis
  • Financing charge is driven by the buyer’s cost of credit

Illustrations below are examples of how Supply Chain Finance transaction flow released the economic value for both buyer and supplier.

Scenario 1 - A typical example of buyer-supplier transaction flow

Step 1

  • Buyer agrees to 90 days credit term
  • Supplier ships goods and invoice buyer
  • Buyer approves invoice on Day 15 and pays 90 days after shipment

Step 2

  • Supplier finances the 90 days period with its trade loan
  • Financing rates can be higher comparatively to what buyer obtain from its bank

Step 3

  • Supplier builds financing cost into cost of goods to buyers.
  • For large buyers who have access to cheaper cost of financing, this is inefficient. Supply Chain Finance can fix this cost inefficiency as illustrated below.

Scenario 2 - A Supply Chain Finance transaction flow

Step 1

  • Buyer agrees to 90 days credit term
  • Supplier ships goods and invoice buyer
  • Buyer completes validating invoice and shipment on Day 15

Step 2

  • Buyer submits approved invoice to HSBC
  • HSBC early pay supplier on Day 15
  • Supplier benefit from lower cost of financing based on buyer’s rating

Step 3

  • Supplier only need to finance the 15 days period as its own competitive rates of the Supply Chain Finance programme for the remaining 75 day tenor.

Deriving Economic Value

The most common way for the buyer to share this economic value with the supplier is to agree on improved payment terms with the supplier in line with the relevant industry norms. In this example, the buyer can extend the terms to 105 days. The supplier will only have to finance the invoice-approval period at its own funding rates (15 days), but it will enjoy the competitive rates of the HSBC Supply Chain Finance programme for the rest of the tenor (90 days, from day 15 to day 105).

This allows the buyer to keep cash longer. Although payment terms are agreed at a longer tenor, the solution provides significant savings to the supplier if the cost of financing is lower than the supplier’s own rate. This gives suppliers the ability to manage longer payment terms.

Potential Benefits of Supply Chain Finance

Supply Chain Finance can place buyers and suppliers in a better position after adopting the programme. The potential benefits below illustrates how Supply Chain Finance may fulfil organisations’ needs to ensure resilience and adaptability in their supply chain to operate with optimum efficiencies.

Potential benefits for buyers

Enhance supplier performance

Inject liquidity into the supply chain, enable suppliers to grow with the buyer. Mitigate risk of supplier’s inability to perform during times of peak deman due to lack of adequate working capital funding.

Reduce supply chain costs

Supply Chain Finance operates on digital platform thus eliminate manual processes and reduce overall supply chain costs with straight-through payment processing. Potentially simplify internal procure-to-pay process by unifying supplier payments under a single model.

Optimising working capital

Potentially may improve payment terms thereby increasing its Days Payables Outstanding.

Accounting consideration

There is a strong case for Supply Chain Finance to be recorded as trade payables rather than bank debit.

Potential benefits for suppliers

Enhance supplier performance

Smaller sized suppliers have easy access to financing without leveraging on existing or additional bank lines thus allow suppliers to expand business (e.g. increase production capacity), cater to just-in-time supply, be responsive to new and more orders, and focus on innovation and quality delivery.

Reduce supply chain costs

Comparatively lower financing costs (for smaller sized suppliers) leveraging on buyer’s strong credit rating. Reduce any collection-related work and cash management costs.

Optimising working capital

Suppliers can unlock cash from ‘trapped’ receivables and improve liquidity position.

Accounting consideration

Supply Chain Finance permits suppliers to derecognise their receivables and recognise cash. Potentially benefits larger suppliers especially public listed companies.

Note: The above accounting treatment benefits derived depends on many factors and are subject to buyers/suppliers obtaining their own professional accounting, tax, legal and other professional advice from their auditors and legal counsel.

HSBC Supply Chain Finance Solutions

The unique selling points and distinctive features of HSBC Supply Chain Finance solutions makes it easy for suppliers to join. With a few simple steps and minimum documentation, suppliers may quickly start receiving early payments for their approved invoices.

HSBC Supply Chain Finance platform enables cost savings by streamlining procure-to-pay and order-to-cash processes for both buyers and suppliers - unifying suppliers’ payments under a single model, develops straight through process characteristics from a treasury perspective and allowing auto-debit payments at maturity, hence reducing the payment-processing costs for buyers. Buyers may take advantage of HSBC Supply Chain Finance Dynamic Discounting feature, providing buyers with the opportunity to use their excess cash to self-fund early payments to suppliers.

More importantly, HSBC is well positioned to help customers meet their sustainable objectives via its Sustainable Supply Chain Financing, a proposition where HSBC can make early payments to customer’s suppliers on terms that consider the suppliers’ sustainability performance. It aims to service the client needs of ensuring sustainable sourcing and reducing the carbon footprint within their supply chain (e.g. scope 3 emissions).

As the Market Leader for Trade Finance in Thailand and Asia Pacific*, our trade specialists are dedicated to support your business needs through customised trade finance solutions, making trade simpler and faster. From helping companies manage payments more effectively to reducing risk through better data visibility into orders placed and invoices paid throughout the entire process — HSBC is committed to providing digital trade finance solutions that will enable Thai businesses to remain competitive in today's global economy.

*HSBC have been voted as Market Leader for Trade Finance in Thailand and Asia Pacific in the Euromoney Trade Finance Survey 2023.

Supply Chain Finance

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