Supply chain finance can help businesses improve working capital, strengthen supplier relationships, and manage cash flow throughout the movement of goods from suppliers to buyers. For financial institutions providing this financing, however, evaluating the immediate borrower or transaction may not provide a complete picture of the risks involved.
Banks must also understand the broader physical supply chain and the factors that can influence the value of the goods they are financing. Commodity prices, production costs, market conditions, and regulatory changes can create risks at multiple points in the chain, making deeper supply chain analysis an important component of informed credit decisions.
Supply chain finance (SCF) is a broad term used to describe the various financing solutions available to businesses to manage their supply chain. SCF solutions can be used to access working capital, reduce costs, improve supplier relations and manage risk.
In this piece the author delves into the importance of understanding the complete supply chain to best identify where credit risks may be lurking within financing decisions. He claims that bankers do not typically have the complete picture to understand broader commodities risk in today’s volatile credit, pricing and regulatory environment, using an example from the agricultural feedstock market to illustrate the point.
Understanding how goods are made is not a simple exercise. Selling money through various SCF techniques without having a fundamental understanding of the chain you are funding is dangerous.
SCF is a multi-faceted series of techniques, where banks and other “funders” can provide financing at numerous points along the physical supply chain. Another example provided is a graphic to detail the factors impacting market pricing for stainless steel, and how the use of predictive commodities forecasting models can assist bankers in making informed funding decisions.
The value of commodities and hence the value of trade that banks finance has dropped tremendously over the last few years. But having the foresight to see when things will change ahead of the curve by understanding what drives prices is critical.
While SCF is certainly gaining wider adoption, the majority of bank-utilized techniques is more around narrower scope payables and receivables financing. However, this article is worth a read to gain some perspective around the full supply chain considerations.
The growing use of supply chain finance creates opportunities for banks to support businesses at numerous stages of the commercial cycle. However, financing goods, receivables, or payables without understanding the underlying supply chain can expose institutions to risks that may not be apparent through traditional credit analysis alone.
Commodity markets illustrate the challenge. Changes in raw material prices can affect production costs, margins, inventory values, and ultimately the financial health of companies throughout a supply chain. A significant price movement at one stage can therefore have consequences for businesses—and their lenders—elsewhere in the chain.
Banks that primarily focus on payables and receivables financing may consequently benefit from taking a broader view of the industries they support. Understanding how products are produced, which commodities influence their value, and what factors could cause prices to change can provide additional context when evaluating financing decisions.
Predictive models and commodity forecasting tools can further support this analysis by helping institutions identify potential changes before they materially affect borrowers. While no forecast can eliminate uncertainty, incorporating these insights into credit decisions can provide a more comprehensive assessment of exposure.
As supply chain finance continues to expand, effective supply chain risk management will become increasingly important. Financial institutions that understand both the financial transaction and the physical supply chain behind it may be better positioned to identify emerging risks while continuing to provide businesses with valuable sources of working capital.
Overview by Steve Murphy, Director, Commercial and Enterprise Payment Advisory Service at Mercator Advisory Group
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