The Six Essences of Supply Chain Finance / What is Supply Chain Finance?

The Six Essences of Supply Chain Finance / What is Supply Chain Finance?Detailed analysis of the three modes and four trends of supply chain

Six Essences of Supply Chain Financing Based on the research results of relevant units and institutions with practical experience in the field of supply chain financing in China, we can derive several essences of supply chains.

1. Supply chain financing is actually a combination of financing services based on the self-compensation of goods sales collection as the basis for risk control through the binding of responsibilities of powerful core enterprises, effective control of capital flow and logistics related to the industrial chain, and the financing needs of different enterprises such as suppliers, distributors and end users in the chain. By providing chain financing, we will promote the continuous and orderly trading of commodities in the entire industrial chain.

Under the "supply chain" financing model, once the enterprises in the supply chain obtain the support of the bank, the "umbilical cord blood" of funds is injected into the supporting enterprises, which is equivalent to entering the supply chain, so that the entire "chain" can be activated, so that the market competitiveness of the supply chain can be improved. With the help of bank credit support, we can win more business opportunities for small and medium-sized enterprises to cooperate with large enterprises for core enterprises.

In fact, it is to provide financing to small and medium-sized enterprises with the help of large enterprises' good business reputation and strong performance capabilities.

2. Chain financing is a combination of related credit, focusing on the analysis of the performance ability of each enterprise in the industrial chain to execute the contract, focusing on the industrial chain of raw material procurement, processing, production and sales of the industrial chain, the whole process of analyzing the financing needs of different entities such as suppliers, manufacturers, distributors, retailers, end users, etc., all-round financing and credit, in-depth exploration of the value potential of the industrial chain, and effective control of bank credit risk.

3. The supply chain financing business requires the bank to have an in-depth understanding and thorough analysis of the operation rules of the industry where the enterprise is located, run the "enterprise-centric" marketing concept through the whole process of business, make the marketing work specialized, deep, refined and detailed, and contract the combination with the main body of the enterprise (core enterprises, suppliers, distributors, insurance companies, logistics supervision enterprises, etc.), and provide a tailor-made package of comprehensive financial service solutions.

4. Under the core enterprise responsibility bundling, analyze the entire industrial chain from the core enterprise, focus on the rational use of bank products, effectively inject bank credit into upstream and downstream supporting enterprises, meet their financing needs, moderately amplify their operating capabilities, and promote the orderly conduct of commodity transactions in the entire industrial chain.

With the strong business operation ability of a strong enterprise, the financing risk of the entire industrial chain is controlled.

5. Supply chain financing is not a single financing product, but a combination sequence of various products, and banks embed the corresponding financing and credit product portfolios according to the characteristics of the capital needs of each node of the industrial chain, including bills and their derivatives, loan financing and related products, settlement, custody, cash management and other non-financing products, forming a product cluster effect.

6. Supply chain financing focuses on the authenticity of the trade background, the continuity of the transaction, the performance ability of the counterparty, the closed operation of the business and the self-repayment of the loan. It moves the loan risk control forward to the production, storage and trading links of the enterprise, and strengthens the risk case prevention of a single enterprise with the overall or partial risk control of the industrial chain.

Supply chain financing can be called an overall solution for key industries, focusing on the value of the entire industrial chain to the bank, and trying to find the value return to the bank from the entire industrial chain, rather than the individual return of each enterprise. Supply chain financing focuses on the operating cash flow on which the enterprise depends, and the financing of the bank is embedded in the blood of the operating cash flow of the enterprise.

What is Supply Chain Finance? A detailed analysis of the three modes and four trends of contributions

Supply chain financial services have set off a boom in the capital market and become a new direction for many industrial transformations, how can B2B enterprises do a good job in supply chain finance?

Supply chain finance has two attributes: industry and finance, and due to the different emphasis on the two attributes, the market has different positioning of supply chain finance. Let's take a look at what supply chain finance will look like from the perspective of finance?

1. Three cores that are different from the tradition

Supply chain finance is not a new term, but its specific operation mode has completed the evolution and upgrading, which is different from the traditional three core points: business subject, credit model and business model

1) Business Entity: The financial business entity ranges from banks to core enterprises. Under the traditional supply chain finance model, banks, as business entities, extend credit to upstream and downstream SMEs based on the credit qualifications of core enterprises. Under the new model, core enterprises have become the main body of financial business, and their sources of funds have also broken through the restrictions of a single channel of banks, further expanded to multiple non-bank financial institutions, and even achieved capital financing by obtaining financial licenses by themselves. Correspondingly, core enterprises also obtained interest rate income that originally belonged to financial institutions.

Different from the mainstream view of the market that financial business is the auxiliary business of core enterprises, as long as supply chain finance can provide greater profits, core enterprises have no incentive to restrict the development of financial business.

2) The credit subject has changed from the original "N" to the current "1". It is difficult for small and medium-sized enterprises to directly obtain bank financing in the bank, and the traditional supply chain finance model obtains bank financing through the class guarantee of the core enterprise, which is essentially still based on the financing of funds based on poor credit, and the bank credit subject includes both core enterprises and small and medium-sized enterprises, that is, the overall credit of N enterprises.

Under the new model, the financier only grants credit to the core enterprises, and the core enterprises extend credit to the midstream and downstream enterprises based on physical transactions, and the capital risk exposure is shifted from the bank to the core enterprise.

In addition, based on their own information advantages in the industry and upstream and downstream enterprises, they can further obtain the benefits of improving their risk pricing capabilities and realize the optimal allocation of resources in the industry.

3) Business model: Supply chain finance is essentially the evolution of the O2O model. Different from the O2O model of general offline experience and online submission of demand, the offline factor is more central in the O2O model of industrial chain finance.

Offline industry factors are the foundation of supply chain finance, and enterprises that have mastered core channels or have core brands have the most advantages in transforming their supply chain finance business, and their core positions are less likely to be replaced by other enterprises.

The biggest role of the online platform is to improve the efficiency of matching supply and demand information, as well as the improvement of operational efficiency. However, e-commerce in the vertical field of the general industry has emerged in recent years, and it is still facing the potential threat of new entrants, and there are few e-commerce platforms that really have the characteristics of "moat", and they need to be deeply explored.

2. The living space of supply chain finance: four interest rate spreads

In order to gain a foothold in the bank-dominated financial system, core enterprises must have their own relative competition points and open up living space through comparative advantages. This subsection is about the existential philosophy of supply chain finance: four spreads.

The first dimension spread: credit spread

The credit gap between core enterprises and small and medium-sized enterprises is the source of funds for supply chain finance. Core enterprises have a larger business scale, occupy a core position in the industrial chain, and high credit has a natural advantage in capital acquisition.

The difference in financing from the financial system is essentially a difference in credit, and it is also the source of funds for supply chain finance. In addition, core enterprises rely on their own strong control of the industrial chain, with more accounts receivable (for downstream enterprises) and accounts payable (for upstream enterprises), and more abundant cash to further enhance their credit rating.

Second-dimensional spread: poor cognition

Based on a deeper understanding of the industry and upstream and downstream enterprises, core enterprises have advantages in risk control. The core competitiveness of the financial sector is still the ability to price risk, and the foundation of core enterprises lies in their natural risk identification ability, so as to obtain excess risk premium.

1) The core enterprises have a deeper understanding of the industry, and have incomparable advantages over the industry cycle and micro operation;

2) Based on business dealings, the information of upstream and downstream enterprises is more core control.　

Third-dimensional spread: model difference　

The real estate mortgage model has differentiated competitiveness. In countries with mature foreign markets, more than 60% of corporate mortgages accepted by banks are chattel mortgages based on inventory and accounts receivable, while domestic real estate mortgages account for more than 70% of the share.

Chattel mortgage has higher requirements for financial institutions, and more frequent monitoring and information exchange is required for collateral, and the current trend of Internet finance has solved this pain point to the benefit, and the core enterprises have more advantages than traditional financial institutions in the financing model with real estate mortgage as the core based on their own business control capabilities, warehousing capabilities and Internet platforms.　

Fourth-dimensional spread: poor ecology　

Rooted in the industry, the supply chain finance O2O ecology is more down-to-earth. Compared with traditional financial institutions, it is easier for core enterprises to build a supply chain financing ecosystem. In the mature stage of development, supply chain finance will establish an ecosystem centered on core enterprises in multiple dimensions such as products, logistics, warehousing, and financial integration.

The penetration of the Internet from consumption to industry and from individuals to enterprises has accelerated the formation of the supply chain finance ecology. Compared with financial institutions that only do financial business, supply chain finance is more sticky to upstream and downstream enterprises on the product business side, and has a more industrial foundation than the O2O model on the product consumption side.　

At present, the core enterprises already have quite superior internal and external conditions: the foundation of the deep cultivation industry, the motivation for transformation, the window of financial reform and the rapid penetration of the Internet, and the future breakthrough point lies in the capital side and risk control mode.

3. Look at supply chain finance from a financial perspective

Supply chain finance has two attributes: industry and finance, and due to the different emphasis on the two attributes, the market has different positioning of supply chain finance. From the perspective of the industry, the financial business is only a supplement to the main business, and its purpose is still to strengthen the main business, and there is no expectation for the volume of the financial business.

From a financial perspective, the supply chain finance business is positioned as a benchmark for the transformation of traditional business, and seeks business promotion with a financial mindset.　　　

1) The financial sector is an industry that has not experienced brutal market-oriented competition, and with the promotion of inclusive finance in policy, the financial market pattern has ushered in variables, and the space is large enough;

2) the inevitable requirements for the transformation and upgrading of traditional industries;

3) Supply chain finance is still essentially a financial business. The capital side, asset side and risk control model are the key elements of financial business.　

Looking at supply chain finance from the perspective of finance, we must grasp the essence of financial business in order to understand the core in the changing supply chain finance model.

Under the framework of supply chain finance, the capital side involves the scale and price of resources, the asset side of the relevant industry space, the industry pattern and the control of the core enterprises over the upstream and downstream small and medium-sized enterprises, and the risk control side depends on the basic model, product standardization degree, storage capacity, etc. Only by mastering the core of the essence of finance can we select truly good targets.　

4. Fund-channel or license

The capital side is the beginning of supply chain finance, and the scale of supply chain finance business is determined in the short and medium term, and the scale and price of funds are the core highlights. In terms of funding sources, it can be divided into external channel funds and internal funds, and the comparison of advantages and disadvantages should return to the impact on capital costs, interest margins and risks.

1) External channel funding　

The essence of the use of external funds is still the credit gap between core enterprises and small and medium-sized enterprises. The more conservative model of supply chain finance is that the core enterprises use their own credit advantages to obtain external funds, and at the same time, based on their own risk control advantages formed by their business dealings with small and medium-sized enterprises, they carry out financing business for small and medium-sized enterprises.

The difference between core enterprises and small and medium-sized enterprises in terms of external financing ability is the difference in credit, and the basis for the existence of supply chain finance is also the extremely poor credit between enterprises.

The size of the credit gap determines the business space, the cost of capital is low, and the scale is easy to reach the upper limit. Under the external channel financing model, the core enterprises and small and medium-sized enterprises are the party B of the financial institutions, and there is no essential difference in positioning, and the real difference lies in the financing ability of external funds, so the size of the extremely poor credit determines the supply chain finance business space.

It is easier for core enterprises to obtain loans from banks, and the cost of loans is lower than that of non-bank institutions, generally around 7%-10%. The biggest bottleneck and capital scale under the external financing model, the financial business obtained based on credit difference, is easily limited in space, which is also the reason for the reservation of the supply chain finance business space from the perspective of the industry.　

Looking at supply chain finance from a financial perspective, we are more optimistic about the model of obtaining financial licenses to obtain sources of funds in the future.

2) Obtain a financial license　　

To identify the value of different licenses, look at leverage, capital strength, and capital price. The greatest value of core enterprises applying for financial licenses lies in the enhancement of control over the capital side, and in terms of business strategy, they are more inclined to the positioning of financial institutions than the pure use of external funds. In terms of value selection, the higher the capital strength, the higher the leverage ratio, and the lower the capital price, the greater the value.　

Asset securitization accelerates the release of leverage. At present, the asset securitization of securities companies has implemented a registration system, and at the same time, various asset management platforms have facilitated the securitization and transfer of financial assets, so as to accelerate the release of capital leverage. If we refer to the proportion of US asset securitization assets in 40% of GDP, the domestic asset securitization space is 5.6 trillion yuan, and the operation space of core enterprises on the asset side will be greatly improved.　

5. Industrial chain foundation

Not all core enterprises in the industry are suitable for industrial chain finance, and only under the scale effect can they have real transformation value. We have summarized the core elements that determine the value of the industry: large industry, strong control, and weak upstream and downstream. There is a lot of room for big industries.

Large industries contain huge financing needs, which means that supply chain finance has potential space, and only when there is a large financial business space, the transformation momentum of core enterprises will be more sufficient.

In addition to the direct impact of scale, the more complex the relationship between core enterprises and upstream and downstream SMEs in large industries, the greater the room for efficiency improvement of core enterprises through the establishment of Internet platforms, and the more obvious the advantages compared with traditional financial institutions.

In the value judgment of supply chain financial assets, the "big industry" is the first, and only the big industry has a greater supply chain finance business development value, and then judge whether the upstream and downstream enterprises have financing needs, as well as the ability of core enterprises to meet the financing needs.　

6. Weak upstream and downstream: There are pain points in financing demand

The strength of the upstream and downstream determines the degree of financing pain points. The weaker the upstream and downstream enterprises, the more their financing needs cannot be fully met, and the existence of financing pain points is the premise of the supply chain finance business of core enterprises.

The deeper the pain point, the greater the space for supply chain finance to exert its relative advantages, and the stronger the upstream and downstream, the more difficult it is for core enterprises to transform financial services.　

Traditional financial institutions mainly use real estate mortgages, while supply chain finance uses chattel mortgages as the main means of competition. In general, small and medium-sized enterprises have fewer fixed assets and more movable assets in the form of accounts receivable and inventory, making it difficult to obtain loans from traditional financial institutions.

Based on the information advantages of physical business transactions, core enterprises carry out relevant movable property pledge financing for small and medium-sized enterprises, forming a competitive pattern of industry differentiation with traditional financial institutions.　

7. Strong control: the ability to solve pain points

Monopoly is superior to oligarchs, and oligopolies are superior to competition. The core enterprises rely on their own advantages in some links in the industrial chain to form a strong market competitiveness, the size of the competitiveness determines its right to speak to the upstream and downstream enterprises, the strength of the right to speak depends on the market pattern of the core enterprises' business operations, monopoly is better than the oligopoly, and the oligopoly is better than the competition.

Among them, the core enterprises in a monopoly position have the strongest voice in the upstream and downstream small and medium-sized enterprises, which will enhance the financial service capabilities of the core enterprises in two aspects:　

1) The stronger the control over the upstream and downstream, the greater the relative credit gap, and the greater the relative advantage of financing;　

2) Stronger ability to lead supply chain finance business.　

Industrial enterprises focus on the middle and upper reaches of the industry, and e-commerce platforms focus on the downstream.

The different positions of core enterprises in the industrial chain will directly determine the business field of their supply chain finance business, and the value can be judged from the breadth and depth of the coverage field. Logistics enterprises cover the widest range of fields, but compared with manufacturing enterprises and e-commerce platforms, the business depth of logistics enterprises is low, and core manufacturing enterprises have close contact with raw material suppliers and distributors.

E-commerce platforms have the lowest breadth, but due to the higher consumption frequency, they have the highest coverage depth, such as JD Baitiao, which is based on big data formed by high-frequency interaction with consumers.　

8. Risk control is real

The essence of financial competition lies in the ability to price risk. In the field of supply chain finance, the essence of the advantage of core enterprises over traditional enterprises lies in the enhancement of risk pricing power. The advantage of e-commerce core enterprises lies in the credit evaluation system under big data, and the advantage of industrial core enterprises lies in the control of movable property financing.

Risk control of industrial core enterprises: product standardization + warehousing capacity. The higher the degree of product standardization, the easier it is to evaluate the value, and at the same time, the highly standardized product is easier to dispose of assets and reduce liquidity risk. The self-built warehousing of core enterprises can effectively control credit risk, and it is also one of the most important factors in the risk control ability of industrial core enterprises.　

Risk control of core enterprises in the platform category: the advantages of big data. The core enterprises of the e-commerce platform have a higher business frequency, the upstream and downstream are suppliers and consumers, based on accounts receivable, prepaid accounts loans and credit financing are the main forms, and the risk control mainly relies on the big data advantages formed by the platform transactions, such as the risk control model of JD Baitiao.　

9. Industry informatization leader

Real transaction data and credit information system are killer features: the industry informatization leader transforms supply chain finance. Industry informatization leader, providing informatization services for a specific one or two or three industries. For a long time, the main profits of information service providers come from the three major parts of software, system integration and system operation and maintenance, maintaining a relatively stable growth rate.

With the continuous development of Internet finance, the entry of leading enterprises in the financial field is becoming the industry standard, and the Supply Chain Finance Institute has also created many cases for this.　

With the help of the promotion and use of software, the industry informatization leader has penetrated into the production and operation transactions of service objects, generating a series of big data, which itself is the natural material of the credit system.　

The essence of supply chain finance is finance, and the credit information system is a leading risk control tool for informatization. The essence of supply chain finance is still finance, and risk pricing ability is still the core content of competition.

According to our analysis in the five-dimensional model, in the comparison of traditional finance, the risk control advantages of supply chain finance have two aspects: the credit information system under big data and the standardization under the financing pledge target.

Five-dimensional model to determine value: the credit system is a killer feature. Relying on big data, industry informatization leaders have advantages in risk control, and the market space varies from industry to industry. It should be pointed out that industry informatization leaders generally lack control over upstream and downstream enterprises, and in a market environment where financial supply is generally insufficient, risk control and business realization models are particularly important.

Supply chain finance has two attributes: industry and finance, and due to the different emphasis on the two attributes, the market has different positioning of supply chain finance. From the perspective of the industry, the financial business is only a supplement to the main business, and its purpose is still to strengthen the main business, and there is no expectation for the volume of the financial business.

From a financial perspective, the supply chain finance business is positioned as a benchmark for the transformation of traditional business, and seeks business promotion with a financial mindset.　　　

1) The financial sector is an industry that has not experienced brutal market-oriented competition, and with the promotion of inclusive finance in policy, the financial market pattern has ushered in variables, and the space is large enough;

2) the inevitable requirements for the transformation and upgrading of traditional industries;

3) Supply chain finance is still essentially a financial business. The capital side, asset side and risk control model are the key elements of financial business.　

Looking at supply chain finance from the perspective of finance, we must grasp the essence of financial business in order to understand the core in the changing supply chain finance model.

Under the framework of supply chain finance, the capital side involves the scale and price of resources, the asset side of the relevant industry space, the industry pattern and the control of the core enterprises over the upstream and downstream small and medium-sized enterprises, and the risk control side depends on the basic model, product standardization degree, storage capacity, etc. Only by mastering the core of the essence of finance can we select truly good targets.