Unlocking the Power of Sustainability: Revolutionizing Supply Chain Finance

Is your finance tied to sustainability performance? Then there's a chance it'll inspire your supplier base, beat your competitors in the long run, and give a more significant financial performance in terms of return on assets and equity.

Numerous enterprises have already adopted sustainable supply chain finance, and it is anticipated that many more will do so in the years to come.

So, what exactly is sustainable supply chain finance?

A sustainable supply chain finance is a financing strategy that serves as a bridge between international buyers and suppliers. In commerce and transactions, it is typical to see that buyers prefer to make payments in as much time as possible, and sellers prefer to collect payments as quickly as feasible.?

Payment delays create a slew of issues. Say you are the CEO of "ABC Furnishings." You are skilled at making first-rate furniture, such as couches, tables, chairs, and desks. You give your customers access to a large selection of ultramodern and durable furniture.

A business, let's say "XYZ Corp," approaches and buys a suit of furniture but puts off making the payments. What happens to your company next is history.

Your company's cash flow hinders, and resources are depleted because of XYZ Corp’s—delayed payment. The growth of your company is hampered as a result.

But there is a fix, and here is where banks enter the picture.

With this payable financing, XYZ Corp. can approach a bank or fintech to have their suppliers reduce their receivables for a little charge. Suppliers profit from the buyer's credit rating and can borrow money at a lower interest rate. ABC Furnishings can use this platform to get paid sooner for a minimal charge.?

Here, ESG is crucial. If, for example, your company ABC Furnishings has higher ESG performance, you would only be required to pay the basic financing rate—for example, 2%—instead of the 5% that other businesses with worse ESG ratings would.

Remember that the lower the cost of capital will be, the stronger the ESG. The lower your company's ESG, the higher its cost of capital will be.

Benefits of Sustainable Supply Chain Finance

For Buyers

• As it is known, consumers around the world today keep a weather eye on environmental and social issues. Customers prefer to buy goods from businesses committed to sustainability. So, if a company wants to sell its products and showcase its commitment to sustainability, it will have to partner with sustainable suppliers. This allows buyers to attract environmentally concerned customers, giving them a competitive advantage.

• Implementing supply chain finance has proven to be a highly effective strategy for enhancing business productivity. By adopting this financing technique, businesses have significantly increased Days Payable Outstanding (DPO), extending credit periods and making transactions more economically viable. This has relieved buyers of the burden of repayment to financial organizations and enabled them to focus on more pressing business matters. Supply chain finance has proved to be a game-changer for businesses looking to improve their financial operations and gain a competitive edge in the market.

• We can all agree that collaborating with environmentally friendly suppliers fosters innovation and encourages product differentiation. Suppliers who adhere to the mantra of "sustainability" will only make R&D investments, eventually resulting in eco-friendly solutions. Buyers can now access these innovations from their suppliers, providing distinctive and sustainable products for their customers.

• By demonstrating a commitment to sustainability and sustainable practices, buyers can draw in and keep top people, access investment opportunities that prioritize ESG, and adhere to the ever-changing environmental requirements.

Let's understand better with an example.?

Explanation with an Example

Let's use the "Sustainers" and "Ecopanles" as an example from the last blog. "Sustainers" is a company that specializes in creating sustainable energy solutions, as was mentioned in the previous blog. "Ecopanles" focuses on solar-powered renewable energy options and can completely transform the clean energy industry. The goal of Sustainers is to lessen their carbon footprint. They work with Ecopanles to install solar panels on the roofs of their production sites to accomplish this goal. The company also aims to establish a robust supply chain finance model by partnering with Ecopanles.

Sustainers know the importance of improving their capacity to create solar panels and the need to invest a sizable sum of money in building the necessary equipment and distribution systems. The company then ultimately decides to proceed and initiate a discussion with financial institutions. Let's imagine that the financial institution in question is called "XYZ Bank" in this instance. They offer clients a way to expand their supplier base and offer the best financial incentives to suppliers so they may become more sustainable.

The bank enables Ecopanels to expand their production capacity, raise the effectiveness of their solar panels, and broaden their market penetration.

In exchange, Sustainers agree to buy a sizable percentage of the solar panels made by Ecopanels for use in their renewable energy projects. This structure creates a consistent revenue stream to recoup the financial investments the partnering financial institutions made while ensuring a steady market for Ecopanels' goods.

In addition to providing Ecopanels with the funding it needs for expansion, the sustainable supply chain finance model that Sustainers and Ecopanels developed also helps the clean energy sector. Sustainers help spread the use of sustainable practices, lessen carbon emissions, and quicken the shift to a greener economy by assisting Ecopanels' growth and promoting renewable energy options.

Learn more about Sustainable Supply Chain Finance in the video above and how ESG-related technological advances can make SCF possible. Learn more about how data, from the perspective of technical suppliers, plays a crucial role in the execution of sustainable plans and how ESG can impact all facets of the enterprise.

A sustainable economy's transition depends heavily on financing. This kind of funding supports the development of new technology, funds initiatives that promote sustainability in business and society, promotes innovation, and helps developing nations.

Does your company wish to implement sustainable supply chain finance effectively? Then your company must:

1. Have a clearer picture of ESG impacts on the supply chain.
2. Have sturdily built policies and practices implementing.
3. Collaborate with suppliers to encourage sustainable practices and ensure financing is provided to support these efforts.