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 supply chain finance techniques without having a fundamental understanding of the chain you are funding is dangerous.
Supply chain finance 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 supply chain financing 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.
Overview by Steve Murphy, Director, Commercial and Enterprise Payment Advisory Service at Mercator Advisory Group
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