Supply chain finance (SCF) is an essential chapter of Supply Chain Management. It connects buyers & sellers with financing institutions. As a result, it helps corporates to lower financing costs and improving efficiency. Most importantly, it unlocks working capital tied in the supply chain. Supply Chain Finance is a segment of Trade Finance.

Supply Chain Financing is a set of services available for Medium-Sized and Big Corporates. For example,  Loans, Purchasing Order Finance, Factoring and Invoice Discounting are the most common.

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Table of Contents

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Why use Supply Chain Finance?

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How Does Supply Chain Finance Work?

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Supply Chain Financing Costs and Fees

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How to Apply for Supply Chain Finance?

Why use Supply Chain Finance?

Supply Chain Finance is popular due to the convenience added to the sales activities. It adds protection to business transactions and promotes import & export activities globally. In other words, it is a win-win-win situation (3 parties, 3 winners).

Let’s dig a bit deeper.

It is standard practice for the buyer of the goods (the debtor) to negotiate payment terms. For example, 60 to 120 days from the delivery of the goods to the settlement of the invoice. Meanwhile, the buyer generates revenue before paying the original invoice.

Likewise, the seller requests financing to have immediate access to working capital. For instance, an injection of cash allows corporates to increase stocks or to pay salaries. Moreover, a short-term credit could help in infrastructural investments as well. In conclusion, through SCF managers can access opportunities otherwise unattainable due to lack of liquidity.

The Financing Institution works as an intermediary; firstly, it onboards and runs the due diligence on the counterparts. Following the Know-Your-Client procedure, it assesses the eligibility of the seller and its debtors. Furthermore, the length of the commercial relationship and the creditworthiness are also analysed. Thus, the company charges a commission depending on the notional amount and the days financed. Indeed, the longer it takes the buyer to pay, the higher the fees.

Have a look at this section to find out the list of other players involved in the supply chain

Important note: commissions and fees are agreed beforehand

 

 

How Does Supply Chain Financing Work?

Supply chain financing through Invoice Discounting can be summed up in the following steps:

  1. KYC and due diligence are performed on seller and debtor(s). Therefore, this validates that both parties are suitable to access SCF services.
  2. The Seller invoices the debtor then sells the invoice to the financial institution.
  3. The Financing Company advances about 80% of the notional amount. So the institution protects part of its exposure from the insolvency of the debtor.
  4. At maturity, the Debtor pays the whole amount of the invoice. Then the funds are transferred to the financing company accounts.
  5. The Intermediary re-pays the seller the remaining 20% minus the agreed fees.

Costs and Fees: an example with Invoice Discounting

ABC limited (the buyer/debtor) is a retail company based in Hong Kong. The supplier is Shoes Pte and it is specialised in manufacturing white socks. They both agree on the following terms specified on the purchasing order:

  • Shoes Pte agrees to produce 1,500,000 pair of white socks at $0.85 a pair. The total amount is $1,275,000
  • Payment terms to be 60 days after the issue of the invoice. The invoice contains the goods description, the quantity and delivery terms.

 

At this stage, Shoes Pte has two options to consider:

Do nothing and wait 60 days before the invoice is settled

Apply for supply chain finance with a reputable institution.

Let’s assume the seller opts for the financing option.

The seller looks on the internet for Supply Chain Finance company in Hong Kong. It finds out that Velotrade is a trade finance company serving the Asia market. Velotrade is a Digital Trade Finance Platform with the headquarter based in Hong Kong.

Perfect!

Breakdown of the costs and fees

The seller and the intermediary negotiate the terms of the financing. Subsequently analysing all the variables, the following terms were agreed:

  Percentage Total
Financing Days   60
Invoice Amount 100% $1,275,000
Financing Amount 80% $1,020,000
Servicing Fees 6% $61,600
Repayment at Maturity 20% – fees $193,400

Shoes Pte sells the invoice to the financial intermediary then it receives an immediate transfer of $1,020,000 directly in the bank account.

 

Fast-forwarding 60 days…

Firstly, ABC Limited (The debtor) pays back the financing company the full invoice amount of $1,275,000.

Then, the Intermediary transfers the remain 20% of the invoice minus the fees to Shoes Pte. As a result, $255,000-$61,600 = $193,400 is the amount transferred into Shoes Pte’s bank account.

With this calculator, you can get a rough estimate of the fees.

If the seller provides non-compliant, defected or damaged goods, then the debtor can raise a commercial dispute. Therefore, the financial intermediary may request the seller to pay back the advanced amount. Furthermore, fees and any interest accrued will also be charged to the seller.

How to Apply for Supply Chain Finance?

Your company must be in business for more than 2 years generating a turnover of over USD 10 million. Both your company and your supplier(s) have a solid transaction track record history.

 

Use Velotrade as your intermediary partner for supply chain financing

Velotrade is an internet-based supply chain financing platform. it allows corporates to sell outstanding invoices through its marketplace. Therefore, Velotrade is an alternative to bank financing. So far, we have helped thousands of businesses (SME’s) financing their working capital needs. 

Velotrade is regulated by the Securities and Futures Commission of Hong Kong. Above all, the SFC promotes fairness, competitiveness and transparency in Hong Kong’s financial markets.

Although we are based in Hong Kong, we work with businesses all over the world. In fact, we accept transactions in a variety of currencies and we cover most of the industries. 

In conclusion, some of the advantages of using Velotrade include:

  • Cash Advance distributed within hours
  • Velotrade’s clients are not locked into a long term contract. Thus, we offer flexibility allowing clients to fund only the invoices they want
  • Simple online sign-up and verification process: not separate ledger required
  • Multi-currency trading capabilities
  • Velotrade reaches a diversity of investors aiming to accommodate 100% of the invoices
  • Fees are transparent and straightforward