The case for Factoring for SMEs
January 7, 2018
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Supply Chain Challenges for SMEs

A key goal of any business is to make profits and enhance its enterprise value. The effective management of working capital and cash flow is a key factor in achieving this. Supply chain management is complex for all businesses within the chain regardless of their size, industry and location. However, it is especially complicated for SMEs. Due to their size, general informality and lack of systems as well as their limited track record underpins the working capital challenges they face. For example, SMEs tend to have less experience, credibility and bargaining power in the market place than their larger suppliers, buyers and competitors. Many smaller businesses frequently must pre-pay or pay immediately for their inputs because they do not have the track record or buying power to secure better payment terms.

SMEs typically have no credit rating, they have few assets that can serve as collateral, and they have no or little formal track-record of borrowing from banks. When they do have a track record they are often not able to present their accounts and finances in a way in which the banks can easily understand and analyze. If SMEs don’t have good access to working capital then they are less able to operate their business efficiently – by taking advantage of bulk discounts and less able to invest in growing their business generally.

SMEs tend to make limited use of or have limited access to technology which can lead to a waste of resources, poor performance, and a transactional focus with poor service which in turn affects the competitive ability of the business. Many SMEs rely on manual collection processes that are paper intensive. This makes the process slow, unreliable and costly. Lack of timely and accurate information results in further delays with invoice reconciliation and delays in incoming payments.

Supply Chain Financing (SCF) products come in to solve these problems that SMEs go through. Their purpose is to improve the overall financial performance of the firms and to mitigate the overall financial and operational risk of disruption in the supply chain. SCF products offer to significantly improve access to finance or reduce the need for external financing by unlocking potential liquidity from within supply chains.

One of the quantitative benefits of SCF include funding, liquidity and working capital savings by offering short-term credit that optimizes working capital for both the buyer and the seller. SCF also has qualitative benefits one of which is enhancing supply chain relationships by encouraging collaboration between buyers and sellers rather than competition.

The scope of SCF may include Inventory finance that either addresses inputs/raw materials, work in progress or finished products. Thereby releasing working capital at these stages. Invoice discounting, another product under SCF, addresses the cash tied in once an invoice has been issued to the buyer.

It should be clear then that if any business is experiencing risky extended supply chains, some sort of SCF is a must in the modern world.

Whilst all these elements are important, a key enabling factor for the effective supply of SCF is effective supply chain management; this is the inter-organizational management of working capital, the financial flows and the information exchanged across the supply chain. Good practices in supply chain management affect practices in supply chain finance options and vice versa.


  1. Rae says:

    I enjoy the article

  2. Bonny says:

    Thank you for the excellent article

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