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Supply chain finance a key advantage post-Covid-19
You need a plan to cope with unexpected supply chain disruptions.
The business disruptions in South Africa brought about by Covid-19 and the national lockdown resulted in many companies finding their working capital tied up in stock that they were unable to sell. Supply chains became heavily congested. This had a knock-on effect on large organisations, including some of the country’s leading corporates, which found it increasingly difficult to support their suppliers – many of which are small and medium enterprises that were already experiencing difficulties simply to keep their operations going during the lockdown.
Under these conditions, corporates are often required to impose extended payment terms on their suppliers as a means of managing their own cash flows. This, understandably, can have devastating consequences for the suppliers, and the distress inevitably filters down through the entire supply chain ecosystem. That’s because most supply chain participants are highly dependent – or even entirely dependent – on their large clients for their survival.
Interruptions in supply chain financing have knock-on effects
The effects of supply chain instability are certainly not only felt by the SMMEs in that chain. For most large companies, these all-important supply chains feed into their primary production, manufacturing, wholesale or retail business models. So, it is essential for their future competitiveness that they find ways of keeping their supply chains as intact as possible during challenging times, especially if they hope to restore their market positions and return to profitability quickly when they are finally able to operate with no Covid-19 restrictions at all.
In addition, historically many corporates have made significant enterprise development investments, either financially in, or by means of providing other resources to, businesses making up their supply chains. The last thing they want to see is all that time, effort and money going to waste as the businesses in their supply chain are forced to close their doors.
One of the most effective ways of achieving essential supply chain viability is through innovative short-term supply chain bridging finance
Although the Covid-19 crisis presented huge challenges for corporates and their supply chains, challenges like these are by no means insurmountable. With a little innovative thinking, and effective partnerships with their banks, corporates are able to help their suppliers survive a crisis.
Effective bridging supply chain finance from Nedbank
One of the most effective ways of achieving essential supply chain viability is through innovative short-term supply chain bridging finance: in Nedbank’s case, the capability it presented to corporates through Nedbank CIB’s market-leading Supply Chain Finance (SCF) offering.
The value of this type of finance is perhaps best illustrated using the Nedbank SCF example. Through the SCF platform, Nedbank CIB acquires the right to repayment of the receivable from a corporate client’s supplier in return for early settlement. This settlement is paid to the supplier at a discount to the face value of the invoice, based on the corporate client’s risk rating, which is typically stronger than that of the supplier. On maturity, the corporate client settles the full value of the invoice to Nedbank.
The model essentially gives the supplier quick and easy access to well-priced liquidity, which means it can sustain its operations. At the same time, the corporate entity can maintain its ‘days payable outstanding’ at an optimal level, which enables it to effectively manage its own cash flow requirements.
It’s a fully digitised model that has proven very successful with Nedbank CIB corporate clients across all industries, with substantial growth in supply chain finance approved to date, mainly for clients in the transport, ICT, retail and diversified industrial sectors.
Ultimately, an effective SCF solution is one that goes beyond merely providing funding for supplier payments. It needs to be backed by a financial institution that fully understands the dynamics of effective supply chain management and can partner with the organisation to help it analyse, understand and optimise its cash conversion cycle to achieve its key working capital objectives.
In return, the organisation can expect to enjoy the loyal support of well-funded suppliers who have not only been enabled to continue trading but have had access to the financial resources to strengthen their business, retain jobs and position themselves for optimal service to their corporate clients when all operational limitations associated with Covid-19 have been lifted.
