Supply chain finance is a method of business transaction that's gained notoriety and popularity within the electronic invoicing vendor world. There are three core elements to SCF - a supplier, buyer and financial institution. With each relying on the other, the ultimate goal is to optimize the relationship between the supplier and the buyer through a series of collaborative efforts that are facilitated by the financial institution.
Unfortunately, SCF hasn't taken off with much success in Latin America, historically speaking. But a lot of that has changed in the past decade or so, thanks to banks better understanding the supply chain relationship between buyers and suppliers, as recently noted by Hernan Mayol, regional sales manager of supply chain solutions at Bank of America Merrill Lynch.
"SCF is finally taking hold in Latin America," wrote Mayol. "Banks have successfully adapted their supply chain offerings to take account of the nature of relationships between buyers and suppliers in the region, and its legal and regulatory diversity. As a result, SCF offers a compelling opportunity for a growing number of buyers and suppliers to strengthen their relationships."
What stood in way of SCF initially
One of the issues that prevented SCF from taking hold as a smart business transaction strategy in Latin America was due to the language barrier between countries like Mexico and Chile - where most people speak Spanish - versus the predominantly English-speaking America, where SCF has its roots, Mayol said. Another formidable obstacle was entities' credit profiles, which are necessary for SCF to effectively work.
"Ordinarily, SCF uses the superior credit quality of buyers to enable suppliers to get paid sooner than usual by financing their receivables below their usual borrowing cost," said Mayol. "In return, buying companies usually increase payment terms, allowing them to extend their days payable outstanding."
He added that while SCF programs strengthened the relationship between buyers and suppliers, this alone rarely served as a compelling reason for suppliers to adopt an SCF model.
In the past decade, however, the SCF model has been refined, evidenced by banks adapting their products to support the needs of buyers and suppliers, Mayol noted. Additionally, more suppliers from the U.S. have built operations closer to buyers so that services can be rendered more quickly.
Without a supplier, buyer and financial institution, SCF wouldn't be possible. The program also relies on invoicing, as this is what suppliers send to buyers so that they can receive payment early on. Supply Chain Financing is about to hit Latin America in a big way. Stay Tuned.