Supply Chain Finance

From Open Risk Manual

Definition

Supply Chain Finance (SCF) is a method of financing and a set of associated Risk Management practices and techniques to optimise the management of the Working Capital and liquidity invested in Physical Supply Chain processes and transactions. Supply chain finance thus covers specific types of Trade activitity that are organized in chains of various lengths and can be considered as a specialized form of Trade Finance. Globalization has been a significant factor in the growth of SCF.

Context

SCF is typically applied to Open Account Trade and is triggered by supply chain events. Finance providers offer their services in the context of the financial requirements triggered by purchase orders, invoices, receivables, other claims, and related pre-shipment and post-shipment processes along the supply chain. Consequently, SCF is largely ‘event-driven’. Each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event or ‘trigger’ in the physical supply chain.

Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.

Supply Chain Finance Taxonomy

The expression “supply chain finance” covers a wide range of products, programmes and solutions in the financing of commerce, including international trade. The following taxonomy has been proposed as a means to organize this type of financial activity[1]. The primary segmentation is based on whether the receivables generated in the supply chain trade are purchased by the financial provider or, alternatively, used as Collateral for advancing funds.

See Also

References

  1. Standard Definitions for Techniques of Supply Chain Finance, Global Supply Chain Finance Forum

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