The essential CFO guide to supply chain financing

Keeping your head above water in business during a pandemic and the many other geopolitical uncertainties in the world right now is no mean feat.

This economic instability is leading CFOs to rethink their approach to ensure that the cash keeps flowing in their business.

But with traditional finance methods for managing cash flow often too expensive or inflexible for many businesses, supply chain finance as an alternative finance method that provides short-term funding to improve your working capital has proven increasingly popular.

“Global and local supply chain constraints have had (and continue to have) a dramatic knock-on effect throughout Australia’s business community. As goods take longer to ship, companies are putting off paying suppliers to protect their cash flow,” notes the Chief Commercial  Officer of innovative working capital solutions provider, Octet, Brett Isenberg.

And while this is a natural reaction, the fact is that slower payments will reduce a business’ ability to get the inventory they need, on the terms that suit them, to stay ahead of their competitors, he points out.

“If you’re a supplier, you’re always going to offer the best terms to those that can pay in advance and order the most stock consistently. We’re seeing an increasing number of CFOs turn to supply chain finance as an effective means of improving their business’ cash flow position by paying their critical suppliers earlier, which in turn fosters long-term relationships that can be relied on when things get tough,” Isenberg says.

If you’re not using supply chain financing yet to even out the natural ebbs and flows of running a business, it might be time to give it a go, he says.

“Supply chain relationships are often uneven in terms of the power each party has in the transaction. Complex supply chains and global trading relationships can exacerbate the problems.

Time delays with cross-border transactions or late payments can have a domino effect across the whole supply chain, he says.

Meanwhile, paying upfront for high-value goods or services can be a big hit to your cash flow.

Using supply chain finance helps to:

• Save money by taking advantage of any early payment discounts

• Still trade as usual with available cash reserves

• Maintain better trading relationships with your suppliers, which strengthens the stability of your overall supply chain.

Who is Octet?

Octet is one of the largest full-service supply chain financiers for SMEs in Australia, with more than 200,000 members  across 72 countries now transacting on its innovative and secure platform.

The firm supported more than $3 billion in supply-chain and trade finance transactions in FY21, recording a 40% YoY growth in transaction volumes, excelling through the COVID-19 effected period.

As an example, Octet recently helped a fashion clothes supplier that had an outstanding ledger of $5 million. The company had one main buyer and a good credit rating, but cash flow bottlenecks were stopping them from growing their business.

A competitor had offered this client debtor finance of up to $2.5 million with an 80% advance rate. However, due to the strength of the company’s balance sheet, Octet offered them the full $5 million finance at 100%.

Isenberg says: “We on-boarded their main buyer, and as soon as they were authorised, we funded the business 100% of the claimed amount, minus our transaction fee. The buyer then had 90 days to repay us, effectively giving them an extension of credit.

“And since our funding was more than double the amount of our competitor’s, our client had the cash flow to effectively double their revenue within the next 12 months. As a result, their net profit after establishing the supply chain finance facility significantly increased,” he explains.

Think of supply chain finance as an innovative hybrid of trade finance and receivables finance – essentially financing (and accelerating the cash flow of) the ‘accounts payable’ and ‘accounts receivable’ aspects of any business and its network of local and global suppliers, Isenberg says.

This financing method protects the supply chains of medium-to-large Australian business by introducing a third party into the buyer-supplier relationship.

“Additionally, a supply chain finance facility is also considered an ‘off-balance sheet’ source of funding, which means that it doesn’t generally affect your ability to access other traditional funding sources, such as traditional bank loans,” Isenberg says.