Supply Chain FinanceThe Basic Concept

Getting Paid (much) earlier

Version 3.29 June 2014

Supply chain finance is a set of solutions that:

optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers,

while also providing an alternative option to their suppliers to get paid early.

This results in- optimized working capital for the BUYER and

- enhanced cash flow for the SUPPLIER,

… while minimizing risk throughout the supply chain.

What is Supply Chain Finance ?

Broadly speaking, it refers to tools, techniques and products that help businesses optimize their cash flow by managing payments to suppliers and receipts from customers.

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supplier

Buyer A

Buyer B ?

BANK has an existing SME (credit) relationship with the SUPPLIER; Supplier asks BANK to discount one or more invoices; BANK will do this under the following conditions:

- it will only discount invoices of acceptable BUYERS;

- it will typically NOT advance 100% of the face value of the invoice (apply a margin);

- repayment obligation remains with its SME client …. the SUPPLIER

Problem: lack of control did supplier perform, are there issues with buyer ?

SME Bankingclient

Invoice Discounting ( Factoring)

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Supplier B

BANK (often) already has an existing credit relationship with the BUYER (Chain Captain); BUYER agrees that BANK may make early payment (= discount) on selected invoices BANK will do this under the following conditions:

- it will only discount invoices of SUPPLIERS that are pre-approved by the BUYER;

- it will (but does not have to) advance 100% of the face value of the invoice;

- repayment obligation is on the BUYER.

Control: no delivery issues ... performance has taken place !

Corporate Bankingclient

Supplier A

Supplier C

Reverse Factoring

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Traditional Factoring Reverse Factoring

Seller-centric model; One supplier > many buyers; Risk is on supplier; This is often a smaller SME; Existing SME credit relationship; Lack of control re ‘performance’; Invoice discounted at margin.

Buyer-centric model; One buyer > many suppliers Risk is on buyer; This is often a Corporate client; Existing Corporate credit relationship; Performance has been confirmed; Invoice discounted at face value.

Both models are similar in the sense that they:

- deal with a commercial relationship between Buyer and Seller;

- provide EARLY PAYMENT to suppliers of goods or services.

Same Product Different Risk

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Aggregator

Supplier B

Supplier A

Supplier C

Wholesaler

Producer

30-60-90 credit terms

30-60-90 credit terms

30-60-90 credit terms

Supply Chain Finance

SME Banking

Liquidity to SMEs

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Aggregator

Supplier B

Supplier A

Supplier C

Wholesaler

Producer

30-60-90 credit terms

30-60-90 credit terms

30-60-90 credit terms

RISK

LIQUITY

Shifting Risk upwards

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All working off the same IT system

buyersuppliers

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SUPPLIER

(SMEs)

Access to liquidity;

Non-recourse working

capital financing, not

affecting SME’s borrowing

base;

Cheaper funding (through

lower arrangements and

monitoring

costs for banks);

Very fast TAT;

Better + easier admin.

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BUYER

(Corporates)

Stronger supplier network;

Standardized payment

processing;

Possibility to stretch

payment terms (w/h

affecting suppliers);

Deleveraging own balance

sheet;

Better + easier

administration.

BANK

Building new SME and (mid-

tier) Corporate

relationships;

Cross-sell existing

relationships;

Utilization Corp credit lines;

Strongly reduced SME credit

risk;

Lower operating costs;

Higher interest + fee

income;

Early mover advantage.

--------------------------------

Defensive strategy:

competition preparing SCF

initiatives as well.

All parties gain ...

Getting Paid (much) earlier

Conclusion

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We view Supply Chain Finance as a critical solution to unlock the Access to Finance challenges of the rural

economies of Africa.Reverse Factoring is the single biggest commercial

breakthrough to shift the risk perceptions of financial institutions and very rapidly improve liquidity to SMEs

and Agricultural stakeholders.