Anirudha Panse, Head of Trade Finance Products at National Bank of Abu Dhabi (NBAD), shares his thoughts with small businesses looking to optimise the management of their working capital and cash
The SME and MME (Mid-Market Enterprises) segment forms an important component of the physical supply chain. The businesses that fall under this category toil endlessly with the aim of providing uninterrupted supplies of critical goods and services (raw materials) to large corporates. This allows large corporates to convert/consolidate such massive amount of supplies into finished goods and deliver them to the mass population in a timely manner. Maintaining a strong and healthy supply chain is critical for any corporate because any disruption in the physical supply chain will result in unnecessary delays and costs. In order to keep the physical supply chain healthy, it is important that the financial needs of the supply chain are handled promptly and efficiently.
Understanding the challenges
Lets take a closer look at some of common challenges that companies typically face in the realm of supply chain.
- Negotiating a trade commercially is generally a win-lose proposition i.e. if one trading party ends up getting a better term, then the other party will most likely be compromised or vice versa. This is even more relevant and challenging if the negotiations revolve around financial considerations. Generally, the SME/MME ends up being on the receiving end and is therefore either left feeling the brunt or having to find its own way to manage business within the negotiated commercial terms.
- Liquidity attracts liquidity. As compared to the SME/MME segment, the large corporates have little problems in raising fresh liquidity in the market. Ironically, the SME/MME is generally the one that needs to be kept liquid to ensure a healthy supply chain.
- Banks/FIs have had a tough experience in the last few years during the financial crisis. This has resulted in tighter regulations for banks; they are urged to follow stricter KYC requirements, stringent lending policies, improved pricing return hurdles, etc. This makes credit scarcer and its generally the SME/MME again that ends up being on the losing side of the financial negotiations.
Solutions for growth
So is there a solution that can create a win-win situation for the large corporates as well as the SME/MME players? Absolutely! Here are a few suggestions of how banks, corporates and the SME/MME segment can create a mutually beneficial system of growth:
– Banks need to ensure liquidity flows into the SME/MME segments without exposing themselves to undue risk on their own balance sheet.
– Banks and large corporates need to collaborate and work together and piece the physical supply chain together with financial supply chain.
The significance of supply chain finance
Large corporates can collaborate with NBAD in offering a Supply Chain Finance (SCF) solution for their suppliers. NBADs SCF solution allows the SME/MME suppliers to raise non-recourse finances against their receivables from the large corporate typically at the large corporate sponsored lower interest rates. This solution thus helps the suppliers in generating liquidity at a lower financing rate contributing to savings in their business. Corporates may ask for a share in the benefits of such reduced interest rate, however the overall deal should still work in favour of the suppliers business. This enables a win-win solution for corporates and their suppliers.
NBAD is the first regional bank to be able to offer a solution which achieves the above-mentioned objectives. It is able to provide a wide portfolio of sound supply chain finance solutions to SME/MME suppliers of a large corporate that banks with NBAD. Some of the primary features of its Supply Chain Finance (SCF) solution are as follows:
- SCF allows financing of domestic and cross border post shipment commercial transactions
- The buyer would buy goods/services in the normal course of their business from various suppliers giving them commercial payment terms
- This generates Accounts Receivables (A/R) in suppliers books
- Using SCF as a tool, buyer allows suppliers to sell the A/R for early cash to NBAD, typically at buyer sponsored interest rate
- Buyer pays NBAD on the commercially agreed due date with the supplier
One of the most striking features of this SCF solution, however, is its high-level of automation that streamlines the end-to-end process making the entire experience hassle free for its users. The web-based platform is fully secure and allows buyers and suppliers to undertake transactions by following a few simple instructions.
NBADs solutions offer the following benefits to buyers and suppliers:
For the buyer:
1. Improves working capital and liquidity.
2. Fosters stable relationship with the supplier ensuring long-term partnerships
3. Allows Off balance Sheet treatment (obligation should not qualify as Bank Debt)
For the supplier:
1. Infuses fresh liquidity, with a positive impact on cash flow.
2. Certainty of payment and a better understanding of the timeline and status of invoices.
3. Provides additional source of financing without impacting existing credit limits.
The experience a financial partner brings on board can help your business unlock value from your supply chain and contribute to the creation of a flexible financing strategy. Partnerships of this kind create a rare win-win situation for the physical supply chain players and help the SME/MME segment concentrate on growing their business without worrying for burgeoning cost of debt or absence of liquidity.