Supply chain finance

Abstract

The concept of supply chain finance is a response to global illiquidity, intensified through the global economic crisis and globalization of commercial and financial flows. The growing illiquidity undermines credit ratings of economic entities, thereby reducing the potential for achieving the projected goals (profitability and portfolio quality). In order to overcome this, banks have introduced certain products flexible to the requirements of specific transactions. The concerned products redirect the focus from a client's credit rating and risk to the credit rating and risk of a business partner (buyer), resulting in benefits for all transaction participants ('win-win-win'). Moreover, the activities are targeted at transaction analysis, i.e. the isolation and protection of the cash flow as the source of financial instrument's repayment. On the other hand, there has been an increasing number of transactions based on the risk of the commercial bank of the client's business partner, or on the risk of collateral (inventory). The focus is actually placed on the financing of adequate supply chain stages, given that counterparty relationship management has been proven to be crucial for efficient management of one's own business. The tensions existing in the relations between partners (increasingly long payment deadlines) are in the basis of the supply chain finance concept. Decisions made by banks are based on the entire supply chain (wide information basis), thereby shifting the focus from the product (as was the case before the crisis) to the client's needs. Thus, decisions become increasingly comprehensive, quicker, and more precise, and portfolios less risky. Through the individual portfolio of banks, the market of national economies also becomes safer and more liquid. These are rather profitable transactions, because, due to the risk transfer, financing is enabled to companies to whom classic crediting in most cases is not available.