Jenny Wiggins reported on September 25, 2019, through Financial Review that the Australian Accounting Standards Board will discuss with the affecting international regulators such as the International Accounting Standards Board about reverse factoring or supply chain finance. The Australian accounting standards setter is taking place this action plan after several concerns in using this financing scheme emerged. The credit rating agency, Moody’s Investors Services, named this type of scheme a tiger trap.
Supply Chain Finance Definition
Supply chain finance is a financing solution wherein the supply chain finance companies such as banks join the equation between the buyer and supplier’s transaction to pay the invoice. This payment plan allows the suppliers to receive the payment sooner than the similar payment scheme, which is making an installment agreement with the buyer, making this type of financing solution a great way to boost a business’s revenue. Supply chain financing makes a win-win situation for both supplier and buyer, since, while the supplier conveniently gets the payment, the buyer can extend the payment term. This methodology, however, comes with a price – discounting supplier’s receivable with financing fees and adding an interest rate to the buyer’s payment.
Issues in Reverse Factoring
As we have mentioned earlier, the standard setters in accounting from the big countries are going to discuss the financing solution because of the risks it can inflict on the businesses. It caught the authorities’ attention because only a few of the involved companies divulged the amount paid through this type of arrangement, making it a risk in companies’ liquidity. According to Moody’s Investors Services, reverse factoring artificially boosts the working capital. Thus, companies should declare these transactions as liquidity risks.
The term ‘tiger trap’ comes from the concept of the same name. People use a tiger trap to catch big animals such as tigers. They use blending leaves and sticks that are only strong enough to carry the weight of small animals as a covering of the trap. Moody’s Investors Services uses this term to compare the structure of reverse factoring. According to the organization, while the company is not experiencing problems, the financier ensures its cooperation, but as the issues arise, the provider cancels its facility.
10+ Supply Chain Finance Samples
Download the following samples to get a better understanding of how you can apply supply chain finance to a real project.
1. Implementing Supply Chain Finance Sample
2. Supply Chain Finance Template
3. Supply Chain Finance Opportunity Sample
4. Supply Chain Finance Checklist Template
5. Evolution of Supply Chain Finance Sample
6. Basic Supply Chain Finance Template
7. Supply Chain Finance Program Sample
8. Effect of Supply Chain Finance on Value of Firms In the Supply Chain
9. Supply Chain Finance in Construction Sample
10. Supply Chain Finance Risk and Evaluation
11. Global Supply Chain Finance
Best Practices in Supply Chain Finance
Despite its high profitability, managing a supply chain finance business can be tight and stressful. However, if you have the relevant skills, such as excellent leadership skills, you will have more chance of becoming successful in this business. We also listed a few tips that you can follow to make your supply chain finance business more successful.
1. Maintain an Organized Chain Management
Whatever type of business you are in, the key of uncomplicating the complex process of a company is by organizing the team. Most likely, your clients only see the facade of the transaction. They don’t have to know the internal communications. For example, the finance department was not aware of the private agreement that the supply chain finance manager made with a supplier. As a result, the finance department may delay the provision of the cash needed for the said deal.
2. Know the Goals of the Clients
Whether you are servicing the end-user or the supplier, it would help if you will conduct a customer analysis or business analysis for your direct customer to know its goals. By understanding the purposes of your client, you can offer them the right service according to what they really need. This method will bring both parties success, which may promote a good relationship and develop your company branding.
3. Maintain a Good Relationship
84% of the corporates that have existing supply chain finance program intends to upgrade their finance solutions. This statistic indicates that the financing solution really helped them with their goal attainment. By maintaining a productive relationship during the entire process, you will increase the possibility of the clients to seek your services again. Additionally, if you are running a small or startup company, this best practice can bring your company success.
It is undeniable that supply chain finance is a significant business sector. Many businesses are including this financing solution as part of their contractor business plan, interior design business plan, and other business plans as part of their capital sources, making the supply chain finance business more successful than ever before. However, you should also know that just almost everything in the business sector is innovating. The time may come that this type of business will either disappear or evolve due to affecting events, such as the existence of disruptive technology. Disruptive technology is responsible for any disruptions to existing methods in various sectors, such as the discovery of the internet.
Another factor that may affect this business is the attention it gets from other business people, which may eventually get in the industry. If that is the case, another player will share the existing market. The market will become more saturated. To increase your competitive edge over your opponents, you have to innovate. Enhance your marketing strategy by conducting market research.
Just like coffee shop businesses, the rising of supply chain finance business may come with multiple issues and conflict with other business aspects. However, as long as you will learn how to adapt and fix these issues, you will not get debunked by these obstacles.
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