Glossary
Supply Chain Finance
The expression indicates the set of the techniques and the financial products used in order to support financially the supply chains, satisfying the requirements of liquidity of the various partners. The operations of Supply Chain Finance can combine a wide range of objectives and diversified according to the roles of the subjects involved (at least Buyer, Supplier and Funder, although different actors can also be involved, in turn bearers of specific objectives). As a rule, the specific objectives of the Buyer combine at least one financial dimension and one supporting the supply chain. The financial dimension is based on an axis whose extremes are the lengthening of payment periods, on the one hand, and the profitable investment of liquidity surpluses, on the other.
The support that the Buyer can provide to its supply chain consists essentially of the flow of liquidity - provided directly or intermediated by financial institutions - and credit. The objectives of the Supplier in a context of Supply Chain Finance are turned essentially to obtain the necessary liquidity for the execution of the supplies, possibly with the least possible impact on the own indebtedness. A modest or zero impact ensures the possibility of increasing sales to the customer without stressing their financial structure.
On the Funder side, the goal is to deploy financial resources with the best risk/return balance. The risks are the classic ones: credit risk to the two counterparties (Buyer and Supplier), dilution risk (ie the risk that the underlying commercial transaction has not been fully executed or, in any case, the debtor is not required to pay its debt), operational risk arising from the way the transaction is completed. In the operational context of Supply Chain Finance, these risks usually present themselves to a lesser extent.
The growing sensitivity towards the key issues of sustainability also affects the evolution of supply chain finance, which increasingly incorporates these variables within its objectives.
Deep Tier Financing
While the traditional approach to Supply Chain Finance is focused on the first level of suppliers of a Buyer, Deep Tier Finance extends its goal of intervention to the next levels. This extension requires the use of more complex tools (especially contractual ones) that take into account a greater number of subjects and relationships involved. The extension of the field of participation to multiple levels of suppliers and relations forces to compete with configurations of more complex risks, that they demand a much more articulated contractual structuring. The practical achievements of this type of intervention are still rather limited and are focused on supporting traceable production and distribution processes, even if articulated on several levels of subjects.
Working Capital
The working capital of a company is constituted by all the short-term assets and liabilities of its balance sheet, linked to the operating management of the company, with the exclusion of financial credits and debts. Working capital is one of the most important management levers for the financial balance of the company, which must continuously coordinate current income and expenses, represented by cash flows (receipts and payments) and goods (warehouse). Balancing active and passive components of working capital is an objective that can often be achieved only by relying on the use of bank credit lines, allowing the advance of payments due by the undertaking pending payment from its customers, or extending payment periods to suppliers. Managing working capital therefore means balancing assets and liabilities, using third party credit (suppliers and banks) and lending to third parties (customers). A synthetic way to measure the equilibrium in the management of the working capital consists in the comparison of the operating cycle active (DSO), passive (DPO) and that of the warehouse supplyes (DIH). The combination of these three indices (DSO-DPO-DIH) measures the overall cash cycle of the company. Positive values indicate the need to use external financial sources, while negative values indicate that operating management generates a surplus of liquidity.
Reverse Factoring
The term refers to the class of agreements between a Buyer and a bank or a factoring company which aim to establish factoring contracts between the Buyer’s suppliers and the bank, within which the supplier will transfer its claims to the Buyer to the bank. The agreements may include commitments of different types of the Buyer towards the bank and methods of reporting the suppliers interested in taking advantage of the assignment of the claims they claim to the Buyer. Factoring contracts between suppliers and banks are normally independent of the reverse factoring agreement Buyer/bank and the Buyer therefore remains outside these contracts.
Confirming
It is the mandate given by a Buyer to a bank to make the payment at maturity of a set of debit invoices issued by its suppliers and that have already been verified by the internal processes of the Buyer itself. Before the payment deadline, the bank proposes to the suppliers the possibility to advance the payment, discounting the relative invoices. Upon expiration, the bank makes payments to suppliers, debiting the Buyer’s account.
The bank may also agree with the Buyer to grant a further deferral of payment, compared to the commercial term agreed with the supplier.