Supply Chain Finance and Dynamic Discounting
Liquidity throughout a buyer’s full supply chain is paramount in today’s economic environment. Buyers can demonstrate commitment to the relationship by sponsoring a supply chain finance program, which leverages buyer risk.
On the other hand, if a buyer is in a cash-rich position—and can pay invoices early—it’s possible to receive a financial return with dynamic discounting.
Inventory Management
The COVID-19 pandemic demonstrated how disruptive events, such as supply chain challenges, affect the just-in-time inventory management method.
Inventory drains capital and uses ample balance sheet capacity. Corporates should actively engage with banks to see how their assets can be better managed, or managed on an off-balance sheet basis.
Selling Account Receivables
Corporates should try to always have a facility in place to sell a pool of account receivables to a bank at a discount for three reasons:
- Increase variable sales
- Accelerate the collections of receivables
- Create an additional liquidity source
If the bank’s discount for the receivables is lower than the corporate’s weighted average cost of capital, the corporate can benefit from discounting the receivables on an off-balance sheet and true sales basis.
Risk Mitigation
Without proper risk mitigation tools, corporates could face lost sales and credit write-downs and be subjected to economic uncertainties.
A commercial letter of credit payable at sight can help increase sales and mitigate risks for the buyer.
Supply Chain Finance and Dynamic Discounting
Liquidity throughout a buyer’s full supply chain is paramount in today’s economic environment. Buyers can demonstrate commitment to the relationship by sponsoring a supply chain finance program, which leverages buyer risk.
On the other hand, if a buyer is in a cash-rich position—and can pay invoices early—it’s possible to receive a financial return with dynamic discounting.
Inventory Management
The COVID-19 pandemic demonstrated how disruptive events, such as supply chain challenges, affect the just-in-time inventory management method.
Inventory drains capital and uses ample balance sheet capacity. Corporates should actively engage with banks to see how their assets can be better managed, or managed on an off-balance sheet basis.
Selling Account Receivables
Corporates should try to always have a facility in place to sell a pool of account receivables to a bank at a discount for three reasons:
- Increase variable sales
- Accelerate the collections of receivables
- Create an additional liquidity source
If the bank’s discount for the receivables is lower than the corporate’s weighted average cost of capital, the corporate can benefit from discounting the receivables on an off-balance sheet and true sales basis.
Risk Mitigation
Without proper risk mitigation tools, corporates could face lost sales and credit write-downs and be subjected to economic uncertainties.
A commercial letter of credit payable at sight can help increase sales and mitigate risks for the buyer.