What is supply chain finance?

Building on what we have termed as traditional trade finance, there are a number of ways in which banks can help corporate clients trade (both domestically and cross-border) for a fee.

A typical service offering from a bank will include:

  • Letters of credit (LC)
  • Import bills for collection
  • Shipping guarantees
  • Import financing
  • Performance bonds
  • Export LC advising
  • LC safekeeping
  • LC confirmation
  • LC checking and negotiation
  • Pre-shipment export finance
  • Export bills for collections
  • Invoice financing
  • Any other relevant document preparation

Despite this focus on the LC, over the years the term trade finance has been shifting away from this sometimes cumbersome method of conducting business. It is now estimated that over 80% of global trade is conducted on an open account basis.

Led by large corporates, this form of trade saves costs and time and so has been adopted by smaller corporates. As they become more comfortable with their buyer and supplier relationships, an agreement is made from the buyer to the financier. Open account transactions can be described as ‘buy now, pay later’ and are more like regular payments for a continuing flow of goods rather than specific transactions. This extension of payment terms is becoming progressively more common as it is much cheaper for the corporates and offers mutual benefits. 

Supply Chain Finance

In response to this development, the organisation SWIFT launched the TSU (trade services utility), a collaborative centralised data matching utility, which allows banks to build products around its core functionality to improve the speed and flow of open account trade. This is helping banks re-intermediate themselves into these trade flows.

While volumes of LCs have remained flat in recent years, their value actually increased and they remain an essential part of emerging market trade and trade in countries where exchange controls are in force. This increase in value is also a reflection of the commodity price boom of 2007/08.