While a business may identify itself in many ways, one of the most common is by its position in a supply chain. This is a network of business partners that produces raw materials, semi-finished goods and finished products and then distributes them to the end customers. A single business entity may find itself playing different roles to different counterparts; it may find itself both upstream and downstream, depending on which trading partner it is dealing with.

In a supply chain, there are three major flows: material, information and financial. Traditionally, information and financial flows have been treated separately, until the advent of electronic-payment solutions that brought together detailed transaction information and associated financial details.

There are, however, many levels of goods and services provided in a supply chain.

A single transaction between two parties usually starts with communication and order placement, followed by entry of the order into the supplier's system. A credit check of the buyer follows, after which documentation of the order, processing and payment details proceed. The order is filled and delivered upon completion and invoicing and payment collection finish the supply-chain process.

Each of these steps in supply-chain management constitutes a cost element that can be linked directly to supply-chain financing.

Supply-chain financing is credit extended by a bank to any trade party along a supply chain, consistent with supply-chain activities. Unlike traditional financing, which is generally extended to a borrower without any restriction on use of the funds, supply-chain financing is granted only when the trade activity occurs along a supply chain.

Banks are also well equipped to help streamline the documentation and payment processes of supply-chain management. Many banks provide an electronic platform called electronic invoice presentment and payment (EIPP), on which both buyers and sellers can submit invoices, make use of credit and pay for purchases. This helps reduce trade-related operating expenses for both buyers and sellers.

Companies that participate in supply-chain financing with banks can look forward to many benefits, both logistical and financial.

By using trade-related information from along the supply chain, banks can more efficiently assess the credit risk of both buyers and suppliers.

Among other things, they can limit the use of credit to transactions related to the borrower's operations. For example, only to purchase goods for resale to end consumers.

This helps prevent excessive borrowing and therefore results in a lower credit risk for banks. Such restrictions enable banks to provide competitively priced credit along the supply chain.

In the course of normal trading, purchase orders, invoices and shipping receipts must be matched in order for transactions to be complete. Mismatches must be reconciled and often end up delaying payment, creating a need for additional working capital until a resolution is reached.

The financing gap associated with these types of delays may create difficulties for a supplier.

When an EIPP system is used, the three-way matching process becomes much easier and occurs earlier in the business cycle. Mismatches can be resolved more quickly without extending the credit term.

Every party comes out ahead when there is less-frequent mismatching and less-costly gaps in financing.

Companies that participate with banks in supply-chain financing are also given access to electronic purchasing and payment methods that allow better and faster capturing of trade data.

When information arrives in real time, crucial decisions can be made much sooner and with a great deal more accuracy. Better and faster decisions can lead to greater cost savings in the medium to long term.

When companies hand over credit and collection tasks to banks in the course of supply-chain financing, they are outsourcing these tasks to organisations that are experts in this field. Often when cash-management services are provided by banks, the entire process is placed on an electronic platform.

Companies can feel free to concentrate on running their business, while leaving the financial operations to banks that can take advantage of experienced professionals on staff as well as enjoying economies of scale.

When financing concerns are alleviated and financial operating tasks outsourced to banks, businesses in a supply chain can concentrate on what they are good at. Supply-chain management tasks can be completed more efficiently, and mismatching of trade documents can be a thing of the past.

Improvements to the supply-chain process encourage better relations between trade partners, particularly if there are no trade conflicts.

Clearly, efficient supply-chain management can help lower costs and increase revenues.

The pressure in most organisations is to improve the productivity of capital. In this regard, it is common to use the concept of return on investment or the ratio between net profit and the capital that was employed to produce the profit.

Supply-chain financing can help increase sales revenues in two ways.

First, as sellers have adequate access to credit, they can expand their sales.

Second, because their buyers have access to more credit, they therefore have more capacity to buy from the sellers.

In addition, supply-chain financing also lowers administrative expenses, because banks integrate the orders and invoice-payment systems of businesses in a supply chain with the bank's own payment and collection system, enabling less administrative work and a better flow of goods and information.

Supply-chain financing also lowers the capital needed for operations. Less capital is tied into accounts receivable, because more sales can be made in cash than on credit terms.

The linkages between supply-chain management and supply-chain financing can no longer be ignored in today's increasingly competitive business environment.

Banks are poised and ready to facilitate better supply-chain financing by offering what they do best - analysing credit risk and providing the corresponding amount of funding - with new electronic technologies that will better serve their supply-chain clients.

This article was provided by Kasikornbank.