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Why Trade Credit Matters – Understanding Supply Chain Finance in Today’s World

Global Business Intelligence recently published its third edition of their Supply Chain Finance (SCF) Payable and Receivable Solutions Guide.  This Guide is designed as educational material for the Corporate world to help those with Credit and Sourcing responsibilities better understand ongoing developments around trade credit and supply chain finance. 

David Gustin, President of Global Business Intelligence and author of the Guide, stated, “I attend a lot of Conferences, and while many talk about the next big thing around technology, or einvoicing, or efficient supply chains, a real discourse on trade credit between banks and corporates generally is lacking.  This to me is a missed opportunity, because credit, particularly for the non investment grade and non rated companies, is going through significant structural changes.”

We are finding a need for the interconnectedness of capital in the supply chain precisely when we have huge market architecture problems.  Banks are much tighter around lending because both Basel 2 and now Basel 3 capital issues have greatly impacted capital costs.  The private insurance market is only a handful of players, who tend to retrench during a crisis.  And there is a very limited secondary market for trade assets with limited access to the Capital markets.  The result is precisely what most companies fear, self-funding a supply chain.  Corporations have hoarded an increasing amount of cash to fund working capital. The pile reached $2.2 trillion at the end of last year, up from $1.5 trillion at the end of 2007, according to data from the Federal Reserve.

The objective of Supply Chain Finance is to create liquidity in the supply chain through various Buyer or Seller-led solutions with or without a facilitating technology. The role of SCF is to optimize both the availability and cost of capital within a given buyer-supplier supply chain.

This year’s Guide focused on issues such as the impact of the Basel capital accord on trade credit to understanding issues from both a Buyer Centric and Seller Centric model.    In this era of tougher credit, particularly for non-investment grade or non-rated corporates, procurement, sales, and finance professionals need to be more aware of how to encompass any financing solution that supports the buyer/seller supply chain, whether it is domestic or global.  Therefore, market participants should take an expanded view on supply chain finance (including areas such as pre-shipment finance, purchase order financing, inventory finance, distribution finance, etc.). 

CFOs, Treasurers, Credit Managers, Procurement professionals and others dealing with the myriad of issues around trade credit should find the content of the Guide useful, especially in light of the on-going credit crisis.

The Guide is available for download at http://www.globalbanking.com/articles.html

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