LETTERS: In the face of new challenges triggered by the pandemic, businesses must continue to ensure their financial sustainability, particularly small- and medium-sized enterprises (SMEs), grappling with limited capital.
This causes severe restrictions to develop or simply break into the market.
The Global Working Capital Study (2018/19) showed that there was up to RM6 trillion in potential monetary value to be accessed by eliminating weak management of working capital in companies.
Analysis indicates that through a stronger balance sheet and better liquidity management, Malaysian firms can account for RM110 billion of financial opportunity.
As such, supply chain finance (SCF) is key to tap this potential.
A standard financial supply chain involves SMEs, larger firms, third-party logistic services and financial institutions.
SCF allows for optimal financial and operational efficiency, and provides the option of delayed terms of payment from buyers to suppliers, while large firms and SME suppliers can still receive earlier payment. This benefits buyers and suppliers.
Buyers can retain working capital, while suppliers gain cash to ensure a consistent flow of finances.
This diminishes risk in the supply chain, while optimising a company's financial sustainability.
SCF is established when a buyer and finance provider reach a particular agreement, after which suppliers are asked to take part.
Certain agreements are backed by one bank or financial provider, while others involve multiple financial institutions.
When banks inject a supply chain with certain amounts of cash or credit, this provides avenues for liquidity for firms that are upstream and downstream in the supply chain.
The execution of SCF is reinforced through financial technology providers to expedite buyer-seller interactions.
Cloud software is employed to facilitate procurements and payable accounts.
This allows suppliers to choose to obtain early payments and, consequently, buyers are able to negotiate extensions to their payment terms.
Buyers typically involve 30 to 50 primary suppliers in their supply chain financing. However, technology allows for thousands of suppliers to access this financing from one company.
The easily-accessible technological platforms allow quick and efficient processes. As soon as the supply chain financing agreement is active, a supplier can request that any particular invoice be subject to early payment.
Let us take the example of Alibaba, China's biggest e-commerce entity, along with its subsidiary platforms, Taobao and Alipay.
Alibaba uses its own funds to provide loans to merchants in its supply chain.
These loans are flexible due to their low threshold and consequently low credit limit.
Sellers on Taobao can apply for loans through the Alipay system, provided that they have a good credit history.
Systems like this encourage the growth of peer-to-peer financing, one among many creative future solutions in the supply chain financing.
Associate Professor Dr Veera Pandiyan Kaliani Sundram
Faculty of Business and Management, UiTM, President, Malaysia Logistic and Supply Chain Management
Professor Dr Jaafar Pyeman
Director, Institute of Business Excellence, UiTM
Umahdevi Jayamani
Financial consultant, SK Group of Companies
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times