Beyond Borders: The Global Odyssey of Supply Chain Financing Standards
12/12/2023
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Supply Chain Financing (SCF), in essence, is not a novel concept. It's roots can be traced back to the early days of trade, where merchants utilized creative financial arrangements to facilitate the movement of goods across distant lands. Be it community trust networks, time drafts or the silent partnerships.
The modern SCF has only gained prominence in the late 20th century, aligning with the globalization of markets and the intricate interplay between suppliers, manufacturers, and distributors.
Over the years, SCF has evolved from rudimentary bilateral agreements to sophisticated digital platforms (including our own initiative KredX GTX), offering a lifeline to businesses by optimizing cash flows and enhancing operational efficiency.
While the SCF landscape has matured significantly, one cannot overlook the conspicuous lack of standardization in processes and terminologies compared to other realms of corporate or commercial financing.
Factoring / Discounting / Receivables financing / Debtor finance are often casually used interchangeably.
Reverse Factoring is also called Payables Financing.
Pre-shipment finance is also known as Purchase Order Financing.
In addition to this, many a times different Financial Institutions structure same products in different ways to cater to the unique needs of their clients. Making it even more perplexing for the businesses seeking financing, to understand, what to expect when they are being sold the services that come under the SCF umbrella.
There are several factors that contribute to this puzzle. Top 3 are listed below -
- Diverse Ecosystem: Supply chains vary significantly across industries, with each having its own unique characteristics and requirements. Be it the product variabilities, different lead times or the demand nature. This diversity makes it challenging to establish a one-size-fits-all approach.
- Impact of Globalization: Supply chains often transcend national borders, involving a multitude of currencies, regulatory frameworks, and legal systems. Harmonizing processes becomes difficult when navigating the complexities of international trade.
- Multiple Stakeholders: Unlike traditional financing models that involve a relatively straightforward relationship between lender and borrower, supply chain financing incorporates multiple stakeholders, including buyers, suppliers, financial institutions, logistics and inspection companies, insurance providers, regulatory bodies from multiple countries etc. Coordinating these diverse entities makes it challenging to bring in the much needed regularization in the system.
In conclusion, the history of supply chain financing is a tale of evolution and adaptation to the ever-changing dynamics of global commerce. While its benefits are evident, the lack of standardization in processes and terminologies remains a persistent challenge. No wonder that after so many years of its prevalence as an alternative financing for businesses, financiers still need to explain to the customers how is SCF different from the term loan they are already availing!
The Global Supply Chain Finance Forum (GSCFF) – comprising BAFT (Bankers Association for Finance and Trade ), FCI (previously known as Factors Chain International), the International Chamber of Commerce (ICC), the International Trade & Forfaiting Association (ITFA) and the Euro Banking Association (EBA) is already leading this cause via various initiatives.
As the industry continues to mature, I strongly believe that more and more stakeholders need to collaborate to establish common frameworks, fostering more streamlined supply chain financing methodologies.
The ITFS framework under which KredX GTX is being operated, is also an initiative that will have a positive impact on the industry, in this respect. By bringing in multiple financial institutions at one marketplace, it is bound to result in consolidation of varied financing structures being offered by banks and SCF providers across the globe. In addition to this, it will also simplify the SCF world for businesses to a great extent.
As the Product Head of global trade vertical, I am driven by the vision of crafting solutions that transcend geographical boundaries, offering a seamless experience for businesses engaged in global supply chains.
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Meghna Gupta
Meghna Gupta, a finance professional with a decade of experience, currently leading product development at KredX. Her focus is on crafting strategies and features that cater to diverse client needs globally. Her expertise lies in product leadership, road mapping, and strategy, supported by an MBA, CFA Level 1. She is driven by innovation, aiming to revolutionize trade finance through tech and user-centric design. You can connect with her on LinkedIn to know more.