Mitigate the credit risks associated with supply chain finance solutions.
What is Supply Chain Finance?
Supply chain finance – also known as supplier financing – is a popular way of improving cash flow for both suppliers and buyers in a supply chain. The buyer engages an external lender to pay the supplier’s invoices early, with the lender offering the buyer attractive terms – typically up to 120 days – to repay the amount.
Supply chain finance is sometimes confused with invoice financing or invoice factoring. Although the key outcome is the same – the supplier gets paid quickly – invoice factoring is a service engaged by the supplier, while supply chain finance is engaged by the buyer. Supply chain finance can be an attractive solution when the buyer has a better credit rating than the supplier.
The role of credit insurance in a Supply Chain Finance solution
Supply chain finance can be enhanced with credit insurance. A lender can use credit insurance to offset the risk of the buyer defaulting on its repayments, while a buyer can make use of trade credit insurance to offset the risk of their own downstream customers defaulting on their payments.
How Supply Chain Finance works
Supply Chain Finance with credit insurance typically involves four parties: the supplier, the buyer, the lender and the insurer. Here’s how it might work in practice in a manufacturing supply chain:
- The supplier is a manufacturer of specialist electronic components. With high overheads and thin margins, it needs to be paid on receipt of its products to keep cash flowing and the business moving. Any delay could destabilise its business, so it prefers to work with buyers who can pay invoices promptly.
- The buyer is a manufacturer of navigation systems. It uses the supplier’s components in its products, selling the finished systems to big automotive manufacturers. It has extended lengthy credit terms to its own customers, which means it needs to hold on to cash for as long as possible, to use as working capital. But it relies on the supplier for critical components, so it also wants to foster a positive relationship with them.
- The lender is a provider of supply chain finance solutions. The buyer gives the supplier an option to have its invoices paid promptly, with a small discount for early payment. It engages the lender to provide this service. The lender pays the supplier invoices as soon as the buyer approves them, keeping the discount as its fee, and gives the buyer a longer period (e.g. 120 days) to repay the sum, improving the buyer’s cash position.
- The insurer provides a credit insurance policy to protect the buyer or lender against non-payment. When the lender takes out the policy, it’s to protect itself against the buyer defaulting on its repayment obligations. When the buyer takes out the policy, it’s to protect itself against its own customers defaulting, ensuring it can still repay the lender as arranged.
Benefits of Supply Chain Finance
Supply chain finance, with or without credit insurance, delivers multiple benefits for suppliers and buyers alike:
- Greater liquidity: Supply chain finance accelerates the flow of cash through the supply chain, improving liquidity and generating working capital that can be invested into business initiatives.
- Increased confidence: Suppliers can increase their business with key customers without worrying about the risk to their business of the customer’s long payment cycles or potential non-payment.
- Better payment terms: Buyers can negotiate favourable payment terms from the lender, allowing them to maximise cash without jeopardising their relationship with suppliers.
- Improved financial position: Supply chain finance removes the relevant receivables from the supplier’s balance sheet, potentially improving their credit rating and access to financing.
- Easier collaboration: Supply chain finance enables buyers and suppliers to work together without the friction that can arise from late payments or punitive payment terms. It can be especially beneficial for small suppliers, as it removes the burden of having to arrange their own invoice finance, and allows them to benefit from their larger customers’ favourable credit ratings.
What solutions does Aon offer for Supply Chain Finance?
With access to the whole of the credit insurance market, Aon can research and tailor a credit insurance policy that supports and de-risks your Supply Chain Finance agreements.
If you are a buyer, trade credit insurance can improve your credit rating with supply chain finance providers, giving them confidence to offer you more favourable payment terms.
Find out more about our credit insurance solutions for Trade Payables
If you are a provider of supply chain finance solutions, credit insurance can protect you against insolvency or protracted default on the part of your clients.
Find out more about our credit insurance solutions for Trade Receivables.
The credit insurance market is constantly evolving, and we keep pace with every development to ensure we can always find the right solution for our clients. Even if you already have credit insurance in place to support your Supply Chain Finance agreements, it’s worth getting in touch to see if we can recommend a solution that better supports your needs and growth plans.
Ask us about protecting your Supply Chain Finance solution today
To find out more about using credit insurance to protect your Supply Chain Finance solution, contact our Trade Credit Insurance team today. Alternatively, fill in our quotation request form and one of our brokers will get back to you as soon as possible.
To find out more about Supply Chain Finance or to get a quote from our team, contact us today.