Week 3: SC Finance
1. Conceptual framework of SC finance
1.1 SC finance definition
First, “supply chain finance” has been used in reference to the management of monetary flows
and financial processes in supply chain. Financial supply chain management is defined as the
“optimized planning, managing, and controlling of supply chain cash flows to facilitate efficient
supply chain material flows” (Wuttke et al. 2013a)
Second, SCF can also be viewed as incorporating the set of financial instruments that enhance
the efficiency of monetary flows in supply chain: “the use of financial instruments, practices,
and technologies to optimize the management of working capital, liquidity, and risk tied up in
supply chain processes for collaborating business partners” (Euro Banking Association 2014);
Third, SCF may simply denote supplier financing as a buyer-driven payables solution—primarily
reverse factoring, in which “the lender purchases accounts receivables only from specific
informationally transparent, high-quality buyers. The factor only needs to collect credit
information and calculate the credit risk for selected buyers, such as large, internationally
accredited firms” (Klapper 2006)
1.2 SC finance solutions
The extensive variety of supply chain finance solutions can be categorized, from diverse
perspectives, in terms of timing of the trigger event, focal point of credit risk, availability of
collateral, and financed elements in the balance sheet.
, Timing of the trigger event
(1) Pre-shipment finance enables a supplier to receive funding from a financier—
based on a buyer’s purchase order— for working capital needs (e.g., the
purchase of raw materials, inventory processing, personnel and management
costs) before product delivery. Because the collateral for pre-shipment finance
is a purchase order instead of an invoice, the credit risk is relatively high; hence
the interest rate for advancing liquidity to the supplier is usually high, though it
could be reduced in light of a well-established buyer’s creditworthiness
(2) In-transit finance provides the borrower with a loan from a financial institution,
where the loan is based on product or inventory (of a certain quantity and
quality) that is currently being transported or enmeshed in other logistics
processes. The portable collateral of in-transit finance is the product deposit in
shipment, so the associated credit risk is less than in the pre-shipment finance
case; hence the loan’s interest rate is accordingly somewhat lower
(3) Post-shipment finance establishes a line of credit from a financier for a borrower
based on (usually, discounted) accounts receivable. The collateral in this case is
the invoice, shipping document, or bill drawn on the buyer. As a consequence,
the credit risk is relatively low and the financing rate is favorable.
1. Conceptual framework of SC finance
1.1 SC finance definition
First, “supply chain finance” has been used in reference to the management of monetary flows
and financial processes in supply chain. Financial supply chain management is defined as the
“optimized planning, managing, and controlling of supply chain cash flows to facilitate efficient
supply chain material flows” (Wuttke et al. 2013a)
Second, SCF can also be viewed as incorporating the set of financial instruments that enhance
the efficiency of monetary flows in supply chain: “the use of financial instruments, practices,
and technologies to optimize the management of working capital, liquidity, and risk tied up in
supply chain processes for collaborating business partners” (Euro Banking Association 2014);
Third, SCF may simply denote supplier financing as a buyer-driven payables solution—primarily
reverse factoring, in which “the lender purchases accounts receivables only from specific
informationally transparent, high-quality buyers. The factor only needs to collect credit
information and calculate the credit risk for selected buyers, such as large, internationally
accredited firms” (Klapper 2006)
1.2 SC finance solutions
The extensive variety of supply chain finance solutions can be categorized, from diverse
perspectives, in terms of timing of the trigger event, focal point of credit risk, availability of
collateral, and financed elements in the balance sheet.
, Timing of the trigger event
(1) Pre-shipment finance enables a supplier to receive funding from a financier—
based on a buyer’s purchase order— for working capital needs (e.g., the
purchase of raw materials, inventory processing, personnel and management
costs) before product delivery. Because the collateral for pre-shipment finance
is a purchase order instead of an invoice, the credit risk is relatively high; hence
the interest rate for advancing liquidity to the supplier is usually high, though it
could be reduced in light of a well-established buyer’s creditworthiness
(2) In-transit finance provides the borrower with a loan from a financial institution,
where the loan is based on product or inventory (of a certain quantity and
quality) that is currently being transported or enmeshed in other logistics
processes. The portable collateral of in-transit finance is the product deposit in
shipment, so the associated credit risk is less than in the pre-shipment finance
case; hence the loan’s interest rate is accordingly somewhat lower
(3) Post-shipment finance establishes a line of credit from a financier for a borrower
based on (usually, discounted) accounts receivable. The collateral in this case is
the invoice, shipping document, or bill drawn on the buyer. As a consequence,
the credit risk is relatively low and the financing rate is favorable.
