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Sustainably improving company liquidity and profitability

Supply chain finance helps to optimize the supply chain and improves the company’s working capital.

Why you should read this article

Companies can improve their working capital through alternative financing. This allows them to leverage potential both on the procurement and on the sales side, such as improved payment terms, and they can increase their returns.

One of the major risk factors for many medium-sized companies is the so-called “sandwich position” between the supplier and the customer. Suppliers often give these companies very tight payment terms, while the companies give long payment periods to their own customers. The result is that medium-sized companies make greater use of their overdraft facilities. Often the identification of a need for improvement in medium-sized companies comes to the financing structure of the supply chain; liquidity and profitability always offer significant optimization potential.

The key term here is supply chain finance (SCF), which is aimed at generally optimizing the financing structures and payment flows, with the goal of improving the company’s liquidity and profitability.

"The special appeal of this supply chain finance solution lies in the fact that the supplier’s future financing terms are based on Buyer’s good credit rating. On that basis it is possible to make cost savings and negotiate longer payment terms."

This begins with the procurement of raw materials or vendor parts, for example. The key here is to negotiate payment terms with suppliers in a way that preserves Buyer’s credit line, allowing him to reduce his financing costs.-Medium-sized companies will usually succeed in doing this if they offer their suppliers a win-win situation.

Inexpensive financing for suppliers

This is exactly where your bank can help. The model: Your bank buys the supplier’s claims against your company from the supplier. This alternative financing structure is cheaper than the overdraft facility offered by the supplier until now. This, in turn, allows the supplier to grant your company the longer payment terms or the discounted purchase price it wanted – without straining their own line of credit. -The special appeal of this sale of accounts receivables lies in the fact that we base the conditions for the supplier on the good credit rating of the company. This makes it possible to negotiate longer payment terms or better cost prices.


UniCredit's Supply Chain Finance Platform

A short introduction.

The particular advantage of this model comes to the fore in the numerous cases where there is a difference between the credit ratings of the supplier and purchaser. As a rule, the suppliers have poorer credit ratings than their customers. This does not affect suppliers within Europe so strongly at present because interest rates remain low. But it is often a very different picture when companies receive deliveries from abroad.

Therefore, companies with partners abroad often find it easier to convince their suppliers with supply chain finance models and to agree on extended payment terms or cheaper purchasing prices.

The customer also derives advantages. Due to the extended payment terms, the working capital of the medium-sized company making the purchase decreases without any additional financing costs because the capital commitment period becomes shorter. Their overdraft facility is not used, capital costs sink, and balance sheet figures improve.

When is this model appropriate?

The model will be of particular interest to medium-sized companies if, for example, their short-term bank debts have increased over the past few years. If only because the accompanying ‘interest cost’ represents a significant indicator for the credit rating, as often explained by Banks’ Trade experts.

The experts at the bank have their eye on these figures. They point out specific improvement potentials with regard to liquidity through appropriate solutions around all aspects of supply chain finance.

This is because it’s vital to get suppliers on board. Organizing supplier conferences has proven to be an extremely efficient and successful measure. UniCredit experts, for instance, help with planning, organization, and supplying information. The work required to implement this kind of purchase finance solution is thereby minimized. The rate at which links are successfully established is rising all the time.


Supply Chain Finance

With medium-sized companies there are often ways of optimizing the supply chain. If the potentials are harnessed intelligently, the company’s liquidity can be improved.

The advantages of supply chain finance for buyers:
  • Improved liquidity and balance sheet figures
  • Lower interest costs
  • Reduced purchase prices
  • Buyers derive an advantage from their supplier’s good credit rating and can strengthen the bond with their business partner
The advantages of supply chain finance for suppliers:
  • The supplier becomes more attractive in terms of financing
  • Lower debtor risk
  • Easier receivables management
  • Shorter capital commitment period
  • Lower financing costs

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Supply chain finance helps to optimize the supply chain and improves the company’s working capital.