What is supply chain finance
Supply chain finance, in simple terms, is a financing model in which banks connect core enterprises and upstream and downstream enterprises to provide flexible financial products and services. Using funds as a solvent in the supply chain to increase its liquidity.
Generally speaking, the supply chain of a specific commodity starts from raw material procurement, to intermediate and final product manufacturing, and finally is delivered to consumers by the sales network, connecting suppliers, manufacturers, distributors, retailers, and end users as a whole. In this supply chain, core enterprises with strong competitiveness and large scale often impose strict requirements on upstream and downstream supporting enterprises in terms of delivery, price, payment terms, and other trade conditions due to their dominant position, thereby causing enormous pressure on these enterprises. However, most of the upstream and downstream supporting enterprises are small and medium-sized enterprises, making it difficult to obtain financing from banks. As a result, the funding chain is extremely tight, and the entire supply chain is imbalanced.

Characteristics of Supply Chain Finance
The biggest characteristic of "supply chain finance" is to find a large core enterprise in the supply chain, and provide financial support for the supply chain from the core enterprise as the starting point. On the one hand, effectively injecting funds into upstream and downstream supporting small and medium-sized enterprises that are relatively weak can solve the problems of financing difficulties and supply chain imbalances for small and medium-sized enterprises; On the other hand, integrating bank credit into the purchasing and selling behavior of upstream and downstream enterprises, enhancing their commercial credit, promoting the establishment of long-term strategic synergy between small and medium-sized enterprises and core enterprises, and improving the competitiveness of the supply chain.
1. The relationship between industrial finance and logistics finance
Supply chain finance is included in industrial finance, which in turn includes logistics finance. The relationship between the three is shown in the following figure, and there is a certain degree of subordination among them.
2. Differences from traditional financial models
The key difference between supply chain finance and traditional finance lies in crisis control and flexibility in credit granting, as shown in the following two charts.
(1) Traditional finance - isolated focus on enterprises and the business itself
(2) Supply chain finance: Commercial banks provide comprehensive financial services to core enterprises and their upstream and downstream related enterprises based on the characteristics of the industry, centered around the core enterprises in the supply chain, and based on the transaction process.
Establish a "1+N" or "M+1+N" financial service model based on core enterprises;
Pay attention to the transaction process, integrate logistics, information flow, and capital flow;
Provide cross industry financial services based on industry characteristics.
3. Participants in supply chain finance
The key participants in supply chain finance include financial institutions, small and medium-sized enterprises, supportive enterprises, and core enterprises that hold a dominant position in the supply chain.
Participating subject functions
Financial institutions provide financing support to small and medium-sized enterprises in supply chain finance. By collaborating with supportive and core enterprises, they tailor their supply chain finance models based on movable assets such as prepayments, inventory, and accounts receivable at various stages of the supply chain.
2. The mode of supply chain finance services provided by financial institutions determines the financing cost and financing period of supply chain finance business.
Small and medium-sized enterprises are affected by the business cycle in their production and operation, and their current assets such as prepaid accounts, inventory, and accounts receivable occupy a large amount of funds. In the supply chain finance model, financing can be obtained from banks through methods such as pledge of property rights and transfer of accounts receivable, which can activate enterprise assets and use limited funds for business expansion, thereby reducing capital occupation and improving capital utilization efficiency.
The crucial coordinator of supportive enterprise supply chain finance provides logistics and warehousing services for small and medium-sized enterprises, as well as cargo collateral supervision services for banks and other financial institutions, building a bridge for cooperation between banks and enterprises. For logistics enterprises participating in supply chain finance, supply chain finance has opened up new value-added services, brought new profit growth points, and provided more opportunities for the standardization and expansion of logistics enterprise business.
Core enterprise 1: An enterprise with a large scale and strong strength in the supply chain, which can have a significant impact on the logistics and capital flow of the entire supply chain. As an organic whole, the financing bottleneck of small and medium-sized enterprises in the supply chain can cause instability in the supply or distribution channels of core enterprises.
2. Core enterprises rely on their advantageous position and good credit to help upstream and downstream small and medium-sized enterprises achieve financing through guarantees, repurchases, and commitments, maintain supply chain stability, and facilitate their own development and growth.
Background and Concept of Supply Chain Finance
In the supply chain, core enterprises with strong competitiveness and large scale play an irreplaceable role in coordinating the information flow, logistics, and capital flow of the supply chain, and it is precisely this position that causes the de facto inequality among supply chain members. As a Wal Mart clothing buyer with a purchase budget of $10 billion said, "I was holding the largest pencil in the United States. If no one did what we wanted and didn't agree with us, I would break the pencil in my hand and throw it on the table, and then go away."
Vulnerable member companies in the supply chain often face the challenge of supplying to core enterprises while also bearing the burden of delayed accounts receivable; Alternatively, funds can be paid in advance to the core enterprise in the form of distribution or deposit before the start of sales. Many upstream and downstream enterprises in the supply chain believe that "financial pressure" is the biggest pressure they encounter in supply chain cooperation. Upstream and downstream enterprises in the supply chain have shared the financial crisis of the core enterprise, but have not received credit support from the core enterprise. Although banks want to grant credit to these enterprises, they often refuse to lend due to various factors such as the small scale of these small and medium-sized enterprises, insufficient collateral, difficulty in controlling production and operation, and poor ability to withstand economic fluctuations.
From an internal perspective of the supply chain alone, core enterprises are unwilling to take on financial crises, and the lack of financing capabilities among small and medium-sized enterprises upstream and downstream of the supply chain is the inherent driving force behind the "obstruction" of supply chain capital flow. But if the core enterprise can inject its own credit capability into its upstream and downstream enterprises, and banks and other financial institutions can effectively supervise the business dealings of the core enterprise and its upstream and downstream enterprises, then financial institutions, as third-party institutions outside the supply chain, can "activate" the flow of supply chain funds and also expand their financial business. This is the background of the emergence of Supply Chain Finance (SCF).
Supply chain finance is a financial innovation business of commercial banks and other financial institutions. Its biggest difference from traditional credit business is that it utilizes the credit capabilities of core enterprises and third-party logistics companies in the supply chain to alleviate the information asymmetry between commercial banks and other financial institutions and small and medium-sized enterprises, and solve the problem of insufficient mortgage and guarantee resources for small and medium-sized enterprises.
Shenzhen Development Bank summarizes the supply chain financing model in the picture as a "1+N" trade financing method, which revolves around a "1" core enterprise, connecting suppliers, manufacturers, distributors, retailers, and end users as a whole, providing comprehensive financing services to the "N" enterprises in the chain.
By participating in the supply chain operation of core enterprise "1", Shenzhen Progress Bank has not only stabilized its business with "1", but also cultivated a customer base "N" in emerging markets, expanded the bank's capital flow, and solved the impact of financing bottlenecks for supply chain member enterprises on supply chain stability and costs.
The supply chain finance innovation of Shenzhen Development Bank has begun to evaluate the credit crisis of small and medium-sized enterprises from a new perspective, shifting from focusing on the evaluation of the credit crisis of small and medium-sized enterprises themselves to evaluating the entire supply chain and its transactions. This not only truly assesses the real crisis of the business, but also enables more small and medium-sized enterprises to enter the service scope of the bank.
Based on the views of many scholars and the industry, the concept of supply chain finance is defined as:
Supply chain finance is a comprehensive financial financing solution implemented by financial institutions around core enterprises, based on credit evaluation and commercial transaction supervision of the entire supply chain, for the management of funds between core and node enterprises in the supply chain.
From this, it can be seen that:
(1) Supply chain finance is a financial service business conducted by financial institutions, which manages the flow of funds in the supply chain.
(2) In the credit evaluation of the entire supply chain, the credit of the core enterprise is given great weight, which means that the credit crisis of the core enterprise is a crucial source of the overall supply chain credit crisis.
(3) The transactions between core enterprises in the supply chain and other enterprises in the chain need to be monitored to ensure that they do not finance false business.
(4) Supply chain finance is a type of financial financing where a company's collateral to financial institutions is not fixed assets, but rather current assets such as accounts receivable, prepayments, and inventory.
The Evolution and Progress of Supply Chain Finance
Since the 2008 global financial crisis, millions of companies worldwide have declared bankruptcy. These bankrupt companies are not due to lack of market competitiveness (such as Chrysler), nor are they due to lack of innovation capability (such as General Motors), but rather due to a chain reaction of supply chain bankruptcies caused by broken funding chains. Since its inception, supply chain finance has been aimed at solving the problems of capital flow obstruction and optimization in the supply chain.
（1） The Evolution of Foreign Supply Chain Finance
Supply chain finance is inevitably centered around the overall operation of the supply chain. Logistics in the supply chain is the physical carrier that capital flow can rely on. Therefore, inventory pledge financing business in supply chain finance has always been the core link of supply chain finance. Without the flow of inventory, supply chain financing models such as accounts payable and prepaid accounts cannot be discussed. It can be said that logistics in the supply chain is the foundation for the development of supply chain finance business.
The supply chain finance of developed Western countries such as the United States is almost carried out simultaneously with other financial businesses, and after more than 200 years of innovation and progress, it has formed the embryonic form of modern supply chain finance. The progress of Western supply chain finance can be roughly divided into three stages.
Stage 1: Before the mid-19th century
At this stage, the business of supply chain finance is very single, and the most important thing is the loan business for inventory pledge. For example, as early as the era of the Russian Tsar in 1905, during the harvest season, when the market price of grains was low, farmers mortgaged most of their grains to banks and used bank loan funds to invest in subsequent production and livelihood; After the market price of grains recovers, sell the grains to repay the bank principal and interest. As a result, farmers can earn higher profits than directly selling grains during harvest season.
Stage 2: From the mid-19th century to the 1970s
At this stage, the business of supply chain finance began to become more diversified, and factoring services such as purchasing accounts receivable began to emerge. But initially, this factoring business was often a form of financial plunder, with some banks and other financial institutions colluding with asset appraisal agencies to deliberately suppress the accounts receivable and inventory sold by companies with liquidity problems, and then selling them at high prices to other third-party intermediaries. The malicious and disorderly operation of some financial institutions has caused serious market chaos and sparked dissatisfaction and protests from enterprises and other banks. In order to regulate market behavior, the United States introduced the Uniform Commercial Code in 1954, which clarified the norms that financial institutions should follow when conducting inventory pledge. As a result, supply chain finance has entered a period of healthy development, but the supply chain finance business in this stage is still mainly based on "inventory pledge, supplemented by accounts receivable".
Stage 3: From the 1980s to the present
At this stage, the business of supply chain finance began to flourish, with the emergence of financing products such as advance payment financing, settlement, and insurance. This is attributed to the high concentration of the logistics industry and the advancement of supply chain theory. In the late 1980s, international critical logistics began to gradually concentrate on a few logistics companies, and some large professional logistics giants such as FedEx, UPS, and Deutsche Bahn Logistics had already formed.
With the progress of globalized supply chains, these logistics companies are more deeply integrated into the supply chain systems of numerous multinational corporations. Compared with banks, these logistics companies have a better understanding of supply chain operations. By cooperating with banks and deeply participating in supply chain financing, logistics companies not only provide basic logistics services such as product warehousing and transportation, but also provide additional services such as quality assessment, supervision, disposal, and credit guarantee for banks and small and medium-sized enterprises, creating huge new growth opportunities for their own performance. At the same time, banks and other financial institutions have also gained more customers and profits.
At this stage, the development of foreign supply chain finance has begun to form an operational concept of "logistics as the mainstay, finance as the supplement", and supply chain finance has made rapid progress due to the deep participation of logistics enterprises.
（2） The Progress of Supply Chain Finance in China
The progress of China's supply chain finance relies on the rapid development of the manufacturing industry during the 30 years of reform and opening up. The "world manufacturing center" has attracted more and more international industrial division of labor, and China has become a gathering point for a large number of multinational enterprise supply chains. China's supply chain finance has made rapid progress, from scratch in just over a decade, from simple to complex, and has implemented many innovations for local Chinese enterprises.
Similar to the development trajectory of foreign countries, the progress of supply chain finance in China also benefited from the rapid development of China's logistics industry in the late 1980s. Since 2000, after the major integration of China's logistics industry, network effects and scale effects have begun to be reflected in some large logistics enterprises, which have also strengthened the overall logistics services of the supply chain in more aspects. At the 2004 China Logistics Innovation Conference, the logistics industry selected four major innovation areas and ten logistics innovation models for the future of China's logistics industry. "Business opportunities for integrating logistics and capital flow" ranked first among the four innovation areas, while "inventory commodity mortgage financing operation mode", "material bank operation mode", and "integrated warehouse operation mode and its series of key technological innovations" ranked first, third, and fourth among the ten logistics innovation models, respectively.
In 2005, Shenzhen Development Bank signed a strategic cooperation agreement with three major domestic logistics giants - China Foreign Trade Transport (Group) Corporation, China National Material Storage and Transportation Corporation, and China Ocean Shipping Logistics Co., Ltd. (i.e. Shenzhen Development Bank headquarters to logistics enterprise headquarters). In just over a year, hundreds of companies have benefited from this strategic partnership for financing convenience. According to statistics, in 2005 alone, the "1+N" supply chain finance model of Shenzhen Development Bank created a credit line of 250 billion yuan for the bank, contributing about 25% of business profits, while the non-performing loan ratio was only 0.57%.
Overall, the current progress of supply chain finance in China presents multiple characteristics: ① Regional imbalance in the development of supply chain finance. Coastal areas with obvious outward oriented economies have relatively advanced supply chain finance, while inland supply chain finance is still in its early stages. In addition, there is no definite name for the business names of supply chain finance in China, including logistics finance, material banking, warehouse receipt pledge, inventory commodity financing, financing warehouse, cargo right financing, and cargo right pledge credit China's supply chain finance is still facing a legal crisis, and there is still a certain legal vacuum in the pledge of liquid assets such as inventory goods. The current situation of separated operation of banks in China has led to the formation of various principal-agent relationships in supply chain finance business. In addition, the backwardness of China's social credit system construction has further caused operational crises in supply chain finance business.
Financing Model of Supply Chain Finance
The forms in which a single enterprise's working capital is occupied include accounts receivable, inventory, and prepaid accounts. Financial institutions classify the basic products of supply chain finance into three categories: accounts receivable financing, prepaid financing, and inventory financing, based on the differences in guarantee measures and guided by crisis control and solution. The following will focus on explaining these three financing methods.
（1） Accounts receivable: Accounts receivable financing
Accounts receivable financing refers to a financing model in which small and medium-sized enterprises in the upstream and downstream of the supply chain can apply for loans from financial institutions with outstanding accounts receivable, provided that the core enterprise of the supply chain promises to make payments.
In this model, small and medium-sized enterprises upstream and downstream of the supply chain are the demand side for debt financing, and the core enterprise is the debtor enterprise and implements counter guarantee for the financing of the debtor enterprise. Once the financing enterprise encounters problems, financial institutions will demand that the debtor enterprise assume the responsibility of compensating for the losses.
Accounts receivable financing enables upstream enterprises to obtain short-term credit loans from banks in a timely manner, which not only helps to meet the short-term funding needs of financing enterprises, accelerate the healthy and stable development and growth of small and medium-sized enterprises, but also benefits the continuous and efficient operation of the entire supply chain.
（2） Prepaid Category: Analysis of Future Cargo Rights Financing Models
In many cases, after paying for goods, companies often cannot receive spot goods for a certain period of time, but they actually have the future ownership of this batch of goods.
Future cargo rights financing (also known as confirmed warehouse financing) is a financing model in which downstream buyers apply for loans from financial institutions to pay for the delivery of goods by upstream core suppliers in the future. At the same time, suppliers promise to repurchase goods that have not been withdrawn and hand over the right of delivery to financial institutions for control.
In this model, downstream financing buyers do not need to pay the full amount of goods at once, and can extract goods from designated warehouses in batches and use future sales revenue to repay loans from financial institutions in installments; The upstream core supplier pledges the warehouse receipt to financial institutions and promises to repurchase the remaining goods if downstream buyers are unable to pay the loan.
Future equity financing is a type of "hedging" financial business that is easily used for market speculation in bulk commodities such as steel. To prevent the occurrence of false transactions, banks and other financial institutions usually need to introduce professional third-party logistics agencies to supervise the goods transactions of upstream and downstream enterprises of suppliers, in order to suppress the possible collusion of upstream and downstream enterprises in the supply chain and cause crises in the financial system. For example, several domestic banks have entrusted China Foreign Trade Transport Group (referred to as Sinotrans) to provide logistics supervision services to their customers. On the one hand, banks can grasp the real situation of logistics in the supply chain in real time to reduce credit crises; On the other hand, Sinotrans has also obtained transportation and warehousing services from these customers. It can be seen that banks and Sinotrans have achieved a "win-win" situation in this process.
（3） Inventory category: Analysis of financing model for integrated warehouse
In many cases, there is only one enterprise that needs financing, and this enterprise does not have corresponding accounts receivable or credit guarantees from other enterprises in the supply chain except for goods. At this point, financial institutions can adopt the financing model of integrated warehouse to grant credit to them. The financing model of Rongtong Warehouse is a financing model in which enterprises use inventory as collateral, and after evaluation and certification by professional third-party logistics companies, financial institutions grant credit to them.
In this model, the devaluation crisis of mortgaged goods is a key concern for financial institutions. Therefore, when financial institutions receive applications for financing warehouse business from small and medium-sized enterprises, they should examine whether the enterprise has stable inventory, whether there are long-term cooperative trading partners, and the comprehensive operation status of the overall supply chain, as the basis for credit decision-making.
However, banks and other financial institutions may not be good at assessing the market value of pledged goods, nor are they good at logistics supervision of pledged goods. Therefore, this financing model usually requires the participation of professional third-party logistics companies. Financial institutions can grant a certain credit limit to third-party logistics enterprises based on their scale and operational capabilities, and logistics enterprises can be directly responsible for the operation and crisis management of financing enterprise loans. This not only simplifies the process and improves the efficiency of financing enterprises' production and sales supply chain operation, but also transfers their own credit crisis and reduces operating costs.
（4） Comprehensive application of supply chain finance financing model
Accounts receivable financing, confirmed warehouse financing, and financing warehouse financing are three representative financing models in supply chain finance, suitable for different conditions of corporate financing behavior. But these three financing models are also several important business modules in supply chain finance, which can be combined to form a combined financing plan involving multiple enterprises in the supply chain. For example, initial inventory financing requires cash redemption of mortgaged goods. If the redemption margin is insufficient, the bank can selectively accept the customer's accounts receivable as a substitute for the redemption margin.
Therefore, supply chain finance is a comprehensive financing solution that serves transactions between supply chain node enterprises. The research group of China Europe International Business School conducted in-depth research on the "1+N" supply chain finance of Shenzhen Development Bank, and summarized applicable supply chain finance solutions based on the characteristics of different entities in the supply chain.
1. Financing solutions for core enterprises
Core enterprises have strong capabilities and high requirements for financing scale, capital prices, and service efficiency. This part of the products includes short-term preferential interest rate loans, bill business (invoicing, discounting), enterprise overdraft limits, and other products.
2. Financing solutions for upstream suppliers
Most upstream suppliers use credit sales to core enterprises. Therefore, the financing plan of upstream suppliers is mainly based on accounts receivable, and it is important to equip products such as factoring, bill discounting, order financing, and government procurement account closed supervision financing.
3. Financing solutions for downstream distributors
The settlement of downstream distributors by core enterprises generally adopts payment before delivery, partial advance payment, or credit sales within a certain limit. Distributors need to expand sales, and any purchases exceeding the limit must also be paid in cash (including receipts). Therefore, the financing plan for downstream distributors should mainly focus on advance payment financing in chattel and cargo pledge credit. The equipped products include short-term working capital loans, invoicing of bills, guarantees, domestic letters of credit, guarantees, commercial acceptance bills with attached guarantee letters, etc.
The Relationship between Banks and Supply Chain Members in the Supply Chain Financing Model
The significance of the role of supply chain finance
In the financing model of "supply chain finance", once an enterprise in the supply chain receives support from banks, the "umbilical cord" of funds is injected into supporting enterprises, which is equivalent to entering the supply chain and activating the operation of the entire "chain"; And with the support of bank credit, it has also won more business opportunities for small and medium-sized enterprises.
1、 Realize the integration of four flows in supply chain finance
Supply chain finance has effectively integrated the four flows of logistics, capital flow, information flow, and business flow.
Logistics: The physical movement of material materials from suppliers to demanders, including the transportation, warehousing, handling, distribution, and processing of goods, as well as related logistics information.
Capital flow: refers to the financial matters involved in the payment of goods by the purchaser.
Information flow: Various types of information related to logistics and capital flow in the entire supply chain, which are also part of logistics and information flow, including purchase orders, inventory records, confirmation letters, invoices, etc.
Business flow: In the supply chain, the funding chains of upstream and downstream suppliers can be integrated by financial service institutions to form business flow.
In the supply chain, logistics, capital flow, information flow, and commercial flow coexist. The combination of commercial flow, information flow, and capital flow will better support and strengthen the exchange of goods and services (logistics) between upstream and downstream enterprises in the supply chain. Traditionally, companies tend to focus on accelerating the flow of logistics in their supply chain, but the flow of funds is equally important for them. With the progress of market globalization and the emergence of trade opportunities in emerging markets, how to manage the capital flow of enterprises has become a key topic of concern for enterprises participating in the supply chain.
2、 Throughout the various stages of the entire supply chain
In order to ensure the smooth implementation of the entire supply chain, enterprises must take a comprehensive view of the overall situation, understand the specific conditions of upstream and downstream enterprises, as well as the related logistics and capital flow information. In many cases, we can find that once there is a problem in the supply chain, it is basically caused by the supplier's inability to provide products according to the contract (such as quality, quantity, date, etc.), rather than the purchaser's inability to pay for the goods. Therefore, as downstream enterprises, they should maintain close contact with upstream suppliers, timely understand various information about suppliers, and avoid supply chain interruptions caused by suppliers' inability to deliver on time. As mentioned earlier, companies usually focus their attention on the flow of goods and only pay attention to whether their goods are delivered in a timely manner as required. However, it is worth noting that the reason why suppliers cannot deliver goods in a timely manner is due to a shortage of funds. Therefore, as downstream enterprises, we should pay more attention to the overall cash flow situation.
3、 Improve supply chain management through financial products
As more and more goods come from emerging markets, it also means that businesses are facing more complex and crisis prone markets, and more and more transactions in the market are being conducted through credit. Enterprises should examine their existing crises and take proactive measures to improve the efficiency of the entire supply chain.
There are many ways to enhance the efficiency of supply chain management for enterprises in the current financial market, among which the most widely used is the supply chain finance products of banks. There is currently a phenomenon where there is a lack of necessary communication between banks and enterprises. Banks generally do not have access to the cash management and working capital status of enterprises, unless it is information related to enterprises that have close business operations and management. In this case, when conducting corresponding financing services separately, banks will face a great credit crisis, and enterprises will naturally be unable to seek more suitable banking products based on their financial situation.
After the implementation of supply chain finance, this situation will be greatly improved. Because supply chain finance is a financial service based on the core enterprise in the supply chain, targeting its upstream and downstream enterprises. Connect upstream and downstream enterprises and banks closely through supply chain finance. Supply chain finance enables the entire chain to form a closed-loop model, allowing banks to accurately grasp information about enterprises at each link. Banks provide financial services to their upstream and downstream through the high-quality reputation of their core enterprises, which to some extent avoids the crisis coefficient. With the help of banks, enterprises can also achieve the integration of information flow, logistics, and capital flow. After receiving payment from the other party, the enterprise can promptly follow up on logistics, achieving high efficiency in fund collection and payment, accelerating the high-speed operation of logistics and fund flow throughout the entire supply chain, and enhancing overall value.
When conducting supply chain finance, the most basic orders and invoices in the supply chain should not be ignored, because orders, as an agreement between suppliers and buyers, directly affect the financing behavior of suppliers before and after shipment, as well as the inventory financing behavior of buyers.