Supply chain finance is a financing model that is different from traditional credit. With the change of industrial operation mode, the service model and leading mode of supply chain finance have been adjusted accordingly, and the business model of supply chain finance has shown a trend of diversification.
Supply chain finance is closely integrated with the industrial chain, which is reflected in different business stages: it is mainly divided into order procurement stage, inventory storage stage, and sales collection stage. There are corresponding financial services at each business stage, financial products are diversified, and the combination of supply chain finance and asset securitization has become a trend.
More and more enterprises are involved in the supply chain finance business. According to the different dominance of each participant, we can divide it into three major business models: core enterprises as the leading, third-party supply chain service providers as the leading, and e-commerce platforms as the leading.
In the mode dominated by core enterprises, we pay attention to the position of core enterprises in the industrial chain, in the mode dominated by third-party supply chain service providers, we pay attention to the information integration capabilities of service providers, and in the mode dominated by e-commerce platforms, we pay attention to the integrity of the platform transaction ecology.
In the process of daily operation, enterprises usually pay funds to purchase materials to form inventory, and then sell products and return cash, thus constituting a business cycle. In this model, working capital is occupied in the form of prepaid accounts, inventory, and accounts receivable, which brings certain pressure to the company's capital turnover and causes tight cash flow.
Supply chain finance is a financing model that is different from traditional credit. Under the traditional credit financing model, financial institutions mainly provide credit based on the historical financial information and collateral of the financing enterprise, while under the supply chain finance model, the capital provider (not limited to financial institutions) can be exempted from reviewing the financial information of the financing enterprise, and instead conduct a comprehensive evaluation of the transaction status of the enterprise in the industrial chain, and provide financing services for a single or multiple transactions.
The business model of supply chain finance shows a trend of diversification: first, diversification of funding sources. In addition to traditional commercial banks and commercial factoring, there are also derivative models such as P2P platforms, small loan companies, and asset securitization. The second is the diversification of participants. The leading party of the business has expanded from core enterprises to professional supply chain service companies, e-commerce platforms and other enterprise types.
Supply chain finance has three characteristics: one is closely related to the transaction of goods, the second is the certainty of capital demand, and the third is the dynamic change with the transaction stage. Supply chain financial services and supply chain financial products also revolve around these three characteristics.
As a financing model different from traditional credit, supply chain finance can provide enterprises with financing services at the corresponding nodes in the industrial chain and improve the turnover capacity of working capital. From the perspective of business entry nodes, it involves three stages: order procurement, inventory storage, and sales collection.
(1) Order procurement stage
The financing carried out by the purchaser as a capital demander for the purpose of booking the purchase and obtaining the goods can be understood as the financing of future inventory. Generally, according to the positioning of procurement, it is divided into two states:
One situation is that the purchaser acts as a distributor, usually in the retail industry. Compared with the upstream is weaker, in the procurement composition needs to pay an advance payment, or even the full payment to obtain the goods, under the dealer model, financing is for procurement, and then sales, the focus is on whether the goods sell well.
Another situation is that the purchaser acts as an agent contractor, usually in the electronics industry and automobile manufacturing industry. Large-scale manufacturing enterprises need a large number of diversified procurement in the production process, and then outsource the procurement process, and the procurement contractor pays the procurement cost in advance. Under the procurement contractor model, financing is to advance procurement funds to the specific demander (employer) and complete the procurement task, focusing on whether the employer can perform the contract.
The financing needs in the prepayment link can be summarized into two categories: one is the dealer, and the other is the agent purchaser. For the first type of entity, the more typical is the confirmation warehouse financing model. Confirmation warehouse financing is a type of prepayment-based financing, which is usually a financing solution for the downstream of the core enterprise in the supply chain. For the second type of entity, the more typical is the financing model of Eternal Asia in agency procurement.
(1) Dealer's prepayment financing model
Case: Confirmation warehouse financing in the high-end liquor industry
In mainland China, high-end liquor is usually in short supply, and liquor producers have a relatively strong bargaining position, usually requiring downstream distributors to pay a large proportion or even all of the payment in advance. However, liquor sales are usually seasonal, and there is a time lag between 3 and 6 months between the reservation and sale of liquor, and the payment of advance payment affects the cash flow capacity and sales scale of downstream distributors. In addition, high-end liquor has the characteristics of strong value-added preservation, storage resistance, and easy realization.
In response to this situation, financial institutions provide financing support by controlling the future delivery rights of finished liquor under the purchase and sale contract signed between liquor distributors and liquor production enterprises, as collateral under financing. In addition, the financial institution requires that the determined use of the funds is to advance the payment to the liquor manufacturer, and the bill of lading obtained after the advance payment is pledged to the financial institution. According to the needs of the bill of lading, the liquor manufacturer will store the finished liquor in the warehouse of the designated third-party logistics enterprise, and the third-party logistics and warehousing enterprise will deliver the goods to the liquor distributor according to the instructions of the financial institution. After the liquor distributor completes the sale, the payment is returned to the financial institution.
Under this model, there may be a problem that the liquor distributor is unable to complete the scheduled sales volume as planned, which in turn leads to the problem of cargo stagnation. Therefore, financial institutions may require liquor manufacturers to commit to repurchase the remaining goods, and usually, high-end liquor manufacturers are relatively strong and unwilling to cooperate with financial institutions to make repurchase commitments, and the financial institutions will dispose of the remaining goods and/or the remaining bills of lading for cash.
(2) Advance payment financing model for agent buyers
Case: Eternal Asia is a third party to advance capital procurement business
Eternal Asia is the first listed company in mainland China with supply chain services as its main business. Among them, providing advance procurement services as a third party is an important part of its business. The background of the rise of the third-party procurement advance business is that enterprises will outsource the supply chain, and the procurement business is also characterized by internationalization due to the international layout of the industrial chain division of labor. International procurement presents the characteristics of many types of procurement, frequent payment of goods, and troublesome import declaration procedures, therefore, Eternal Asia provides advance services to enterprises while undertaking outsourcing procurement, and then settles with enterprises in a unified manner. Financial institutions provide corresponding financial support according to the frequency of Eternal Asia procurement and the amount of procurement.
(2) Inventory custody stage
There is a certain time lag from the purchase in place to the completion of sales, or from the production stage to the completion of sales, when the goods assets are in the inventory storage stage. In addition to being stored in the company's own warehouse, the inventory storage stage may also be stored in the warehouse of the logistics company or the port company. In addition, in addition to static storage, inventory may also be in a dynamic phase of transportation.
Inventory, as a form of asset, is actually an occupation of the cash flow of the enterprise. The capital demander can pledge the goods to obtain financing, and the standardized goods are often strong pledgeable.
Inventory is used for pledge to obtain financing, and the corresponding supply chain financial products include warehouse receipt pledge financing, movable property pledge financing, etc. In practice, commodity trading enterprises have control over goods and are the main demand for this type of financing. In this case, financial institutions usually provide financial support based on warehouse receipts, use the subject matter of warehouse receipts as pledges, provide security means for the realization of creditor's rights, and use external logistics and warehousing enterprises as regulators to achieve control of the goods.
Since there are both static storage and dynamic transportation of inventory, financial institutions can also provide financing solutions under the dynamic mode of inventory, with the total amount of inventory approved and the inventory kept at a minimum. In this mode, it is often necessary to monitor the status of the goods in real time with the help of Internet of Things technology.
(3) The stage of sales collection
From the completion of the sale to the waiting for the payment of this stage, the formation of accounts receivable, this stage of financing needs are to speed up the sales collection. It can also be usually divided into two situations:
First, as a large enterprise entity, the upstream enterprise has a relatively large sales volume, and usually forms a large amount of accounts receivable, but there are differences in the payment cycle of many distributors.
Second, strong downstream entities will require upstream enterprises to give larger commercial credit lines or longer terms, transferring the pressure of the capital chain to the upstream, making enterprises bear greater pressure on the debt side. The characteristics of enterprises in the communication industry, pharmaceutical circulation, and construction engineering are more prominent.
The size of the accounts receivable and the length of the account period are important factors affecting the capital arrangement of the enterprise. In order to speed up the revitalization of assets, there is a demand for accounts receivable to be pledged and resold for financing.
Accounts receivable formed in the sales collection stage is an asset in the form of creditor's rights. Businesses can use this right as a pledge to obtain financial support. According to the direct demand side of funds, it can also be divided into two situations: one is the core enterprise with a large sales volume, and the other is the weak enterprise with a long receivable period.
In the first case, the core enterprise is the financing party of accounts receivable, due to the relatively large sales volume, usually a large amount of accounts receivable is formed, but there are differences in the payment cycle of many distributors, in order to speed up the collection of their own sales, the accounts receivable formed by sales are pledged for financing. The financing under this model is based on the scattered accounts receivable, small amounts, and low default rate, which can form a pool of accounts receivable funds.
The second situation, that is, the situation where a vulnerable enterprise with a long receivable period is more common as a financier. It can usually be divided into indirect financing and direct financing models. Direct financing is mainly accounts receivable pledge financing, with pharmaceutical distribution enterprises as the case, while indirect financing is mainly asset securitization, such as supply chain ABS for real estate enterprises, and Vanke supply chain factoring ABS is taken as the case below.
Case: Accounts receivable pledge financing for a pharmaceutical distribution company
With the expansion of the scale of hospital credit sales, the amount of the company's accounts receivable has also expanded, which is one of the main characteristics of the pharmaceutical circulation industry. At present, there are different degrees of arrears of funds between pharmaceutical sales enterprises and production enterprises, between sales enterprises and hospitals, and between sales enterprises in mainland China. Under the accounts receivable pledge financing model, it mainly depends on the repayment ability and willingness of the downstream debtor.
For the situation that the downstream is too strong, financial products can be used to alleviate the financial pressure. If the quality of the accounts receivable is good or recognized by market investors, the accounts receivable can be realized through asset securitization, and the funds can be withdrawn in advance to alleviate the pressure on the capital chain.
Case: Vanke supply chain factoring ABS
Supply chain factoring ABS is a model that combines supply chain finance and asset securities, and here we take Vanke supply chain factoring ABS as an example for analysis. The original creditors are many upstream suppliers, and the actual debtors are Vanke Group and its subordinate project companies, and there is a receivables and payables relationship between the two parties. For the supplier, this is a credit-backed accounts receivable right with Vanke as the core enterprise, and now the income right is packaged and sold to an intermediate factor, and the factor converts the accounts receivable income right into an asset securitization product through an asset-backed plan, and the market investors subscribe for shares. On the maturity date, Vanke will transfer the account into a special account and pay it to market investors. The key link here is that the first step is to confirm the underlying assets, which requires Vanke to issue a payment confirmation and act as the co-debtor of each accounts receivable claim of the project. That is, under this model, it also relies on the payment ability of core enterprises.
(4) Summary
The financial products derived from supply chain financial services are diverse, which can be summarized as follows: the prepayment link is mainly confirmation warehouse financing/bill of lading financing, the inventory link is mainly warehouse receipt pledge financing/right pledge financing, and the accounts receivable link is mainly accounts receivable factoring financing, accounts receivable pledge financing, accounts receivable securitization, etc.
Since the supply chain finance business revolves around procurement, production, and sales, and has a wide range of applications, more and more enterprises participate in the supply chain finance business. The supply chain finance business involves many participants, including core enterprises, suppliers, distributors, logistics companies, and third-party service agencies. According to the dominance of each participant, we can divide it into three business models.
(1) Led by core enterprises
The supply chain finance model dominated by core enterprises is the most common, usually for enterprises in asset-heavy industries, relying on their own strong control over the upstream and downstream of the industrial chain, such as automobiles and heavy industry machinery, and adopting the "M+1+N" model. Financial institutions provide financial support to the upstream and downstream of the supply chain out of recognition of the credit of core enterprises.
(2) Led by third-party supply chain service providers
With the development of supply chain finance, the third-party supply chain service as the leading model has gradually matured. We call it a one-stop supply chain financial service platform, which integrates the information flow in the supply chain and provides enterprises with services including passing, foreign exchange settlement, logistics, tax refund, and financial integration. Under this model, the control of credit risk mainly depends on the business integration ability of supply chain service providers and their credit capabilities, and Eternal Asia is a representative of this model. At present, some trading enterprises and logistics companies are involved in the model of third-party supply chain services, which means that it is possible that third-party supply chain service companies are overlapping with multiple roles.
(3) Led by e-commerce platforms
E-commerce platform supply chain finance is a new trend, for example, Ant Financial/Alipay mainly uses the perfect e-commerce sales and logistics service information in the Alibaba ecosystem to become a closed-loop cash flow system. It can supervise the authenticity of its transaction background, the certainty of the flow of funds, the closure of the operation and the self-compensation of funds. Under this model, there is no core enterprise and no pledge process for goods. The funder provides capital services based on the comprehensive analysis of the procurement system and capital flow system of small and medium-sized enterprises in the Alibaba network, which is a relatively new type of financial service based on the expansion of the supply chain system. The focus is on whether the procurement, transportation, sales, and capital systems of the e-commerce platform are complete.
(4) Summary
Since the supply chain finance business revolves around procurement, production, and sales, and has a wide range of applications, more and more enterprises participate in the supply chain finance business. With the change of industrial operation mode, the service model and leading mode of supply chain finance have been adjusted accordingly, and the business model of supply chain finance has shown a trend of diversification. According to the dominance of each participant, we can divide it into three business models. Led by core enterprises, led by third-party supply chain service providers, and led by e-commerce platforms. As business models change, so does the focus.
Once the industry is in a state of overcapacity, the final sales of products will be under pressure, and the value of the industrial chain cannot be realized, which will bring irresistible credit risks.
Source: CSI Pengyuan Rating. Source: EBS Fixed Income Research, Everbright Securities Fixed Income Research