Topic 1 What is supply chain finance?

Introduction
In this topic, you will explore the definition of supply chain finance and review the
terminology in common use, focusing in particular on the standard market definitions first
published in 2016 by the Global Supply Chain Finance Forum (GSCFF), and enhanced in
2021.

In addition you will learn about how supply chain finance relates to traditional trade finance
and how the distinction between the two concepts is becoming less clear and less important
due to the impact of new technology. You will also look at how the trend towards open
account settlement is stimulating the demand to create new finance solutions.

Learning objectives

By the end of this topic you will understand:

• the terminology used by finance providers in respect of supply chain finance

solutions;
• the standard market definitions as set out in the first edition of GCSFF’s Standard
Definitions for Techniques of Supply Chain Finance, and the enhanced additional
techniques added in 2021;
• how supply chain finance relates to traditional trade finance; and
• the difference between transactional and flow-based finance.

Think...

How do you think trading internationally might impact a company’s financial health?

Are there any functions in your organisation that deliver supply chain finance to clients?
What are they called and where are they positioned within the organisation?

Are there separate departments delivering trade finance, invoice finance and supply chain
finance, or are they integrated into a working capital finance division?

© The London Institute of Banking & Finance 1

1.1 Terminology in common use
Supply chain finance

The term ‘supply chain finance’ has only recently entered into the vocabulary of finance
providers. As a consequence, there has been a lack of consistency among practitioners with
some adopting a very narrow, single-product definition and others referring to a much
wider family of solutions.

Broad definition of supply chain finance

This includes solutions that facilitate domestic and international supply chains. Traditional
trade finance products would belong here alongside ‘open account’ solutions.

Narrower definition of supply chain finance

Using a very narrow definition, many finance providers have launched a product that
finances approved payables and called this ‘Supply Chain Finance’. Others have launched
precisely the same product and called it ‘Reverse Factoring’, ‘Payables Finance’ or ‘Supplier
Finance’. In certain countries, notably Spain, a fundamentally similar product is known as
‘Confirming’.

Definition of trade finance

The term ‘trade finance’, by contrast, has been in common use for centuries. It is generally
accepted to refer to the intermediation by banks through the control of documents relating
to the shipment of the underlying goods.

Benefits of trade finance to the client

These include:

• risk mitigation (through the use of trade instruments such as letters of credit,
collections and guarantees);
• finance (using trade instruments as a basis for the provision of finance); and
• settlement (the trade instruments themselves often incorporate the settlement
process).

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1.1.1 Increase in open account transactions

Open account

“An open account transaction in international trade is a sale where the goods are shipped
and delivered before payment is due, which is typically in 30, 60 or 90 days” (International
Trade Administration, no date).

Characteristics of open account settlement

The term ‘open account’ is generally understood to mean that:

• the shipping documents are not controlled through the banking system but are sent direct
by the exporter to the importer;
• the importer’s bank does not make a conditional undertaking to pay upon fulfilment of
specified conditions on behalf of the importer; and
• the importer settles with the exporter directly by making a clean payment after an agreed
deferred credit period.

The percentage of international trade settled on open account terms has followed an
increasing trend over many years whereas the use of traditional trade finance instruments
now only accounts for around 10% of trade transactions.

Open account trade statistics

Reliable statistics are difficult to source since traditional trade instruments, which can be measured
by SWIFT message traffic, are not used in ‘open account’ transactions. Rethinking trade & finance
estimated that 90% of trade transactions are settled on open account terms (ICC Banking
Commission, 2017). In the 2020 ICC Global Survey on Trade Finance, respondents cited supply chain
finance as a major growth area for global banks whereas local banks expect limited growth, possibly
reflecting different views of the evolution of their market and conditions to support open account
trade and supply chain finance (ICC Banking Commission, 2020).

Figure 1.1 Documentary trade v open account, 2011–2028

© The London Institute of Banking & Finance 3

 Source: ICC (2020)

FACTFIND

Quantifying the market

Christian Hausherr, Chair of the Global Supply Chain Finance Forum (GSCFF), and Andreas
Struzycki, Head of International Trade and Transaction Banking, Credit Agricole Corporate
and Investment Bank, compare various efforts to quantify the size of the supply chain
finance market.

Find out more:

GSCFF: Market size matters: Unravelling the literature on supply chain finance market sizing

In Topic 2, you will learn more about the differences and similarities between international
trade and domestic trade. We will also look more closely at some of the ideas, theories and
facts put forward in the ICC publication, Rethinking trade & finance.

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1.2 Bank intermediation
Seller and buyer risks

You will note that, due to the absence of bank intermediation, ‘open account’ settlement is
the highest risk option for the exporter, but the lowest risk option for the importer. We
should also recognise that ‘payment in advance’ is an equally valid settlement method. This
is the highest risk option for the importer and the lowest risk option for the exporter.

A traditional trade finance solution may be regarded as an alternative to both payment in

advance and open account settlement as it:

• provides the exporter with varying degrees of protection against non-payment whilst
providing a finance solution to fund the deferred credit period; and
• enables the importer to avoid incurring the risk and negative working capital impact
of paying in advance.

Reintermediation

The general trend towards open account settlement has disintermediated banks from the
practice of financing international trade and has, as a consequence, impacted the ability of
trading companies to access finance to support international trade. This is particularly acute
in the small and medium-sized enterprises (SME) segment, especially in emerging markets.
The development of supply chain finance solutions aims to address this problem in a
manner that is more efficient than traditional trade finance. Also promising is that while
local banks in emerging markets still lack appetite to provide open account trade finance
solutions, reform of their legal systems and a growth in training is beginning to change
attitudes in some countries.

As banks sought to reintermediate themselves in the ‘open account’ space, certain

techniques have gained more acceptance. These techniques are now included in the
broadest definition of supply chain finance, alongside the approved payables finance
product and the traditional trade finance products.

1.3 Standard market definitions

Given the fast growth and complex nature of supply chain finance, much has been done in
recent years to clarify and standardise the definitions used. This is mainly comprised of the
work of the GSCFF, which will be referred to frequently throughout this qualification.

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1.3.1 Background to GSCFF

The GSCFF was established in 2014 to provide clarity around the terminology used when
discussing this area of finance.

The forum comprises representatives from the ICC Banking Commission, BAFT, the Euro
Banking Association (EBA), Factors Chain International (FCI) and the International Trade and
Forfaiting Association (ITFA). The International Factors Group (IFG), which was also one of
the original contributors, has since integrated with FCI. BAFT is based in the USA and was
formed following the merger of the Bankers Association for Finance and Trade (BAFT) and
the International Financial Services Association (IFSA).

Standard market definitions for supply chain finance techniques and practices were first
published by the GSCFF in 2016. They were enhanced in 2021 to better represent global
practice.

1.3.2 Definition of supply chain finance

The Standard definitions for techniques of supply chain finance, provides the following high-
level definition of supply chain finance and highlights important associated characteristics.

Standard definitions for techniques in supply chain finance

Supply chain finance (SCF) is defined as the use of financing and risk mitigation practices and
techniques to optimise the management of the working capital and liquidity invested in
supply chain processes and transactions. SCF is typically applied to open account trade and
is triggered by supply chain events. Visibility of underlying trade flows by the finance
provider(s) is a necessary component of such financing arrangements which can be enabled
by a technology platform.

(GSCFF, 2016, p8)

FACTFIND

Standard definitions for techniques in supply chain finance

In the topics that follow, we will refer to these as the ‘standard definitions’.

Explore the Global Supply Chain Finance Forum website to read a brief definition.

Homepage: Global Supply Chain Finance Forum

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Read the original version of the standard definitions, published in 2016, by the Global
Supply Chain Finance Forum, which includes two categories of techniques.

Global Supply Chain Finance Forum: Standard definitions for techniques of supply chain
finance

Third category – Advanced payables

A third category of techniques, advanced payables, was introduced in 2021. Find out more
about all three categories of these techniques. You will learn more about categorisation in
Topic 11 and about each individual technique in subsequent topics.

Global Supply Chain Finance Forum: Techniques

1.3.3 Key characteristics of supply chain finance

The GSCFF have determined that financing options that have the following characteristics
fall under the umbrella of their definition of supply chain finance.

Portfolio of risk mitigation techniques and practices

Supply Chain Finance is a portfolio of financing and risk mitigation techniques and practices
that support the trade and financial flows along end-to-end business supply and distribution
chains, domestically as well as internationally. This is emphatically a ‘holistic’ concept that
includes a broad range of established and evolving techniques for the provision of finance
and the management of risk.

Open account

Supply Chain Finance is usually, but not exclusively, applied to open account trade. Open
account trade refers to trade transactions between a seller and a buyer where transactions
are not supported by any banking or documentary trade instrument issued on behalf of the
buyer or seller. The buyer is directly responsible for meeting the payment obligation in
relation to the underlying transaction. Where trading parties supply and buy goods and
services on the basis of open account terms, an invoice is usually raised and the buyer pays
within an agreed time frame. Open account terms can be contrasted with trading on the
basis of cash in advance, or trading utilising instruments such as Documentary Credits, as a
means of securing payment.

Parties

Parties to Supply Chain Finance transactions consist of buyers and sellers, which are trading
and collaborating with each other along the supply chain. As required, these parties work
with finance providers to raise finance using various SCF techniques and other forms of
finance. The parties, and especially ‘anchor’ parties on account of their commercial and

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financial strength, often have objectives to improve supply chain stability, liquidity, financial
performance, risk management, and balance-sheet efficiency.

Event driven

Finance providers offer their services in the context of the financial requirements triggered
by purchase orders, invoices, receivables, other claims, and related pre-shipment and post-
shipment processes along the supply chain. Consequently, SCF is largely ‘event driven’. Each
intervention (finance, risk mitigation or payment) in the financial supply chain is driven by
an event or ‘trigger’ in the physical supply chain. The development of advanced
technologies and procedures to track and control events in the physical supply chain creates
opportunities to automate the initiation of SCF interventions in the related financial supply
chain.

Evolving and flexible

SCF is not a static concept but is an evolving set of practices using or combining a variety of
techniques; some of these are mature and others are new or ‘leading edge’ techniques or
variants of established techniques, and may also include the use of traditional trade finance.
The techniques are often used in combination with each other and with other financial and
physical supply chain services.

(GSCFF, 2016, p8–9)

1.3.4 Differentiating factors

A set of techniques

Supply chain finance is not a ‘product’ but a set of techniques and practices. The reference
to techniques and practices, rather than products, recognises the fact that different finance
providers can and will brand their own ‘products’ as they see fit for marketing purposes.
Each ‘product’, irrespective of its proprietary label, will be an example of a defined
technique.

Ambiguity around the inclusion of traditional trade finance products

Supply chain finance delivers risk mitigation and finance. Using these broad criteria,
traditional trade finance should be included as one of the techniques or practices. However,
the definitions also specify that supply chain finance is “usually, but not exclusively applied
to open account trade” (GSCFF, 2016, p8). This would therefore appear to exclude
traditional trade finance.

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Many parties involved besides buyers and sellers

The primary parties are the seller and the buyer. As we shall see in Topic 3 How it works –
Physical supply chain], other stakeholders are also involved in supply chain finance,
including finance providers and parties involved in the logistics associated with international
trade.

Driven by events

Supply chain finance is triggered by events along the supply chain. This is what differentiates
it from other forms of working capital finance or general lending.

Technological innovation

Advanced technologies are already being used to capture the events that trigger supply
chain finance interventions. There is clearly potential for further use of
blockchain/distributed ledger technology, artificial intelligence and machine learning. Many
practitioners would consider that the use of advanced technology is itself one of the
defining characteristics of supply chain finance.

Constantly evolving combinations and possibilities

Supply chain finance is not a ‘static concept’. This definitional statement allows for the
combination of a variety of techniques and practices, including the use of traditional trade
finance products.

1.4 Techniques and practices

As you learned in the factfind panel in section 1.3.2, the update published in 2021 by the
GSCFF Forum has grouped these techniques into three broad categories:

• receivables purchase;
• loans; and
• advanced payables.

Figure 1.2 GSCFF supply chain finance techniques

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 Source: GSCFF (2022)

This distinction between the categories is important, for the following reasons.

Receivables purchase

With receivables purchase, a finance provider becomes the owner of the receivable. They
are buying an asset, not making a loan. The sale of the asset to the finance provider may be
accomplished by the assignment of the receivable to the finance provider or, in the case of
forfaiting, by negotiation of the bill of exchange or promissory note.

Loans

With loans, a finance provider is not buying asset, they are making a loan. That said, the
loan might be secured by an assignment of a receivable or other collateral.

Legal position and accounting treatment

Assignment of a receivable can, therefore, apply to both receivables purchase and

loan/advance-based categories, but the legal position and accounting treatment are not the
same.

Advanced payables

This category is a recent addition and reflects structures that are deemed not to fall into the
receivables purchase or loan categories. Two of the three techniques included in this category are
corporate payment undertaking and bank payment undertaking, which are undertakings by a
corporate or bank on behalf of another corporate, respectively. In either case, the recipient might
raise funds against the payment undertaking. The third technique is dynamic discounting, which
represents an advance payment that is paid by the buyer directly to the seller.

1.4.1 Receivables purchase category

This section covers the standard definitions of each technique, taken from the GSCFF
document.

Receivables discounting

Receivables discounting includes solutions that are well-established products in their own
right and were in existence long before the term ‘supply chain finance’ was first coined. A
typical receivables discounting transaction would cover selected receivables or selected
debtors and would be suitable for a larger corporate. Finance would generally be offered on
a confidential/undisclosed basis and may be offered on a non-recourse basis.

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Receivables discounting is a form of Receivables Purchase, flexibly applied, in which sellers
of goods and services sell individual or multiple receivables (represented by outstanding
invoices) to a finance provider at a discount (GSCFF, 2016, p88).

Forfaiting

Forfaiting is also a product in its own right, with its own set of rules as enshrined in the 2012
ICC publication, Uniform Rules for Forfaiting. Most trade finance practitioners would regard
forfaiting as a traditional trade finance solution since it involves bills of exchange and
promissory notes, both of which feature heavily in other trade finance products.

Forfaiting is a form of Receivables Purchase, consisting of the without recourse purchase of

future payment obligations represented by financial instruments or payment obligations
(normally in negotiable or transferable form), at a discount or at face value in return for a
financing charge (GSCFF, 2016, p82).

Factoring

Factoring is generally a ‘whole turnover’ solution in which the finance provider (the ‘factor’)
purchases all receivables, not just those that are eligible for financing. This is often known as
‘full factoring’ and is generally a ‘disclosed’ solution, in which the factor’s role is known to
the buyers and the factor takes responsibility for the collection of payments. A very
common variant is invoice discounting, which is usually undisclosed/confidential and does
not include the management and collection services.

Factoring is a form of Receivables Purchase, in which sellers of goods and services sell their
receivables (represented by outstanding invoices) at a discount to a finance provider
(commonly known as the ‘factor’). A key differentiator of Factoring is that typically the
finance provider becomes responsible for managing the debtor portfolio and collecting the
payment of the underlying receivables (GSCFF, 2016, p81).

Payables finance

Payables finance is a relatively new innovation, though very similar in principle to the
Spanish process known as ‘confirming’. Many finance providers brand their payable finance
product ‘Supply Chain Finance’.

Payables finance is provided through a buyer-led programme within which sellers in the
buyer’s supply chain are able to access finance by means of Receivables Purchase. The
technique provides a seller of goods or services with the option of receiving the discounted
value of receivables (represented by outstanding invoices) prior to their actual due date and
typically at a financing cost aligned with the credit risk of the buyer. The payable continues
to be due by the Buyer until its due date (GSCFF, 2016, p86).

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1.4.2 Loan category

Loan or advance against receivables

A loan or advance against receivables is a secured loan, where the finance provider has
recourse to the seller but is deriving comfort from the receivable as a source of repayment.

Loan or advance against receivables is financing made available to a party involved in a

supply chain on the expectation of repayment from funds generated from current or future
trade receivables and is usually made against the security of such receivables, but may be
unsecured (GSCFF, 2016, p84).

Distributor finance

Distributor finance is a long-standing solution that pre-dates the use of supply chain finance.
Finance is arranged by a large manufacturer to enable their distributors to stock the
manufacturer’s products. The borrower is, however, the distributor, not the manufacturer.

Distributor finance is financing for a distributor of a large manufacturer to cover the holding
of goods for re-sale and to bridge the liquidity gap until the receipt of funds from
receivables following the sale of goods to a retailer or end-customer (GSCFF, 2016, p79).

Loan or advance against inventory

A loan or advance against inventory is a loan secured against stock. The GSCFF document
also mentions the ‘true sale’ variation, which is not technically a loan at all, but is similar in
principle to receivables purchase in that the finance provider becomes the owner of the
asset.

Loan or advance against Inventory is financing provided to a buyer or seller involved in a

supply chain for the holding or warehousing of goods (either pre-sold, un-sold, or hedged)
and over which the finance provider usually takes a security interest or assignment of rights
and exercises a measure of control (GSCFF, 2016, p84).

Pre-shipment finance

Pre-shipment finance is a well-established loan-based solution that has been used

extensively as part of structured trade finance solutions.

Pre-shipment finance is a loan provided by a finance provider to a seller of goods and/or

services for the sourcing, manufacture or conversion of raw materials or semi-finished
goods into finished goods and/or services, which are then delivered to a buyer. A purchase
order from an acceptable buyer, or a documentary or standby letter of credit or a Bank
Payment Obligation, issued on behalf of the buyer, in favour of the seller is often a key
ingredient in motivating the finance, in addition to the ability of the seller to perform under
the contract with the buyer (GSCFF, 2016, p87).

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1.4.3 Advanced payables category

This category was introduced by the GSCFF in 2021 and includes three techniques which are
briefly described below:

Corporate payment undertaking (CPU)

A CPU is an unconditional and irrevocable commitment given by a buyer to its finance provider to
pay an approved amount to a seller on a confirmed invoice due date(s). The seller has the option to
request discounted early payment from the finance provider.

Corporate payment undertaking is a deviating understanding of payables finance where the buyer
sends a payment instruction to the finance provider and the seller will receive an advanced (or early)
payment. The deviation results from the fact that unlike in a payables finance scenario, the finance
provider will not purchase the underlying receivable from the seller, but fully rely on an irrevocable
payment undertaking from the buyer (GSCFF, 2021, p5).

Bank payment undertaking (BPU)

A BPU is provided under a buyer-led programme within which sellers in the buyer’s supply chain
receive an independent and irrevocable payment undertaking from the buyer’s bank to pay the
accepted invoice(s) (or the buyer’s approved amounts relating to such invoice(s)) on the due date.
The seller has the option to use this BPU to approach the BPU issuer or its own chosen finance
provider to agree an early payment at a discount.

Bank payment undertaking is a technique that leverages a B2B network (which can be DLT based).
Following a ‘matched transaction’ in that network, a bank may issue a payment undertaking at the
benefit of a corporate beneficiary or another bank. Such bank payment undertaking may be the
basis for a financing (GSCFF, 2021, p6).

Dynamic discounting

Dynamic discounting is a buyer-led solution that allows sellers to receive early payment on a buyer’s
outstanding invoices at a discount to the invoice value. The discount applied is ‘dynamically’
calculated based on the number of days settlement occurs prior to the original invoice due date.

Dynamic discounting is an advance payment that is directly paid by the buyer to its seller. Unlike
in other SCF techniques, there is no financing from the finance provider but rather a service to the
buyer/seller in calculating (and optionally processing) the discount amount the buyer needs to pay.
The buyer will pay the original invoice amount at a discount out of its own cash (GSCFF, 2021, p6).

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1.5 Supply chain finance relative to trade finance
As we have seen from our review of the standard market definitions, there is no clear
distinction between supply chain finance and trade finance. As noted in section 1.1, trade
finance is characterised by bank intermediation to mitigate risk, provide finance and arrange
settlement. Such intermediation involves the handling of shipping documents which provide
a security interest in, and a measure of control of, the underlying goods. As such, letters of
credit and documentary collections are clearly traditional trade finance products.

The following table illustrates the key characteristics that tend to result in certain solutions
being labelled ‘trade finance’ and others ‘supply chain finance’.

Table 1.1 Trade finance and supply chain finance compared

Characteristic Trade Finance Supply Chain Finance

Level of bank More likely to be HIGH. More likely to be LOW.
intermediation (risk Supply chain finance was
mitigation, finance and Trade finance solutions developed in the open
payment) incorporate all three account space, where bank
elements through control of intermediation was limited
shipping documents. to making the payment.
Transactional security (title More likely to be HIGH. More likely to be LOW. Due
to goods, control of goods to the relative lack of
and security interest in Trade finance solutions have intermediation, the
receivable) the potential to incorporate potential to exercise
all three elements through transactional control is
control of shipping more limited, though a
documents and associated security interest in the
security documentation. receivable is usually
achievable.
Basis of finance availability More likely to be More likely to be FLOW-
TRANSACTIONAL. BASED.

In order to benefit from The greater efficiency and

transactional security, high lower handling costs
levels of transactional associated with flow-based
control are required. This is financing are amongst the
more likely to be achievable reasons for the trend away
when finance is made from traditional trade
available on a transactional finance.
basis.
Pre- and post-shipment More likely to be HIGH. More likely to be restricted
finance to post-shipment.
Trade finance instruments
and structures facilitate Supply chain finance
finance across the end-to- solutions tend to be based
on invoices.

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 end trade cycle from
purchase order to payment.

As advances in technology begin to replace paper with data and enable finance providers to
gain title to, and control of, goods without the need for traditional paper documents such as
bills of lading, we can envisage alternatives to traditional letters of credit which might be
regarded as digital trade finance or supply chain finance, depending on the perspective of
the finance provider.

1.6 Transactional finance or flow-based finance

Another way of distinguishing between trade finance and supply chain finance relates to the
way in which finance is made available to clients. There are no absolute rules in this regard
and the standard market definitions do not make any reference to this whatsoever.
Nevertheless, it is worth understanding the difference between ‘transactional finance’ and
‘flow-based finance’.

Insofar as finance relates to the movement of goods, it is possible to provide finance to the
client either on the basis of individual consignments or on the basis of a flow of regular
consignments.

Transactional finance: individual consignments

Trade finance tends to be based on individual consignments. Each trade finance transaction
relates to a specific shipment of goods. The shipping documents associated with a typical
trade finance transaction must, by definition, relate to a particular shipment. A letter of
credit may, for example, cover multiple shipments, but each documentary presentation
under the letter of credit relates to a single shipment. This enables the finance provider to
exercise rigorous transactional control and to take a security interest in the underlying
goods themselves. This level of risk mitigation is typical of the traditional approach to trade
finance.

Flow-based finance driven by transactional data

Supply chain finance can also be transactional but is more likely to be ‘flow-based’, albeit
driven by transaction data. With factoring, for example, the finance provider does not
finance individual invoices but calculates an ‘availability’ based on an agreed percentage of
the aggregate value of eligible invoices that are outstanding at any point in time. The
‘availability’ increases as new eligible invoices are raised and decreases as invoices are paid.
The client is allowed to draw funds up to the value of the resulting ‘availability’. There is no
direct transactional control as such, though the finance provider’s interests are protected
through rigorous monitoring.

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A further distinction relates to the point in time when finance is available. Trade finance has
always included the ability to provide finance and/or credit support prior to shipment,
whereas most supply chain finance solutions are invoice-driven and, therefore, restricted to
post-shipment finance scenarios.

As technology-enabled supply chain finance continues to evolve, it is likely that we will see
both transactional solutions and flow-based solutions being made available both pre-
shipment and post-shipment, further eroding the perceived distinction between supply
chain finance and trade finance.

1.7 Scope of supply chain finance in this course

In this course, you will learn about all of the techniques included in the standard definitions
which form the basis for further exploration. Though supply chain finance is relevant to both
domestic and international trade, much of the focus will be on international trade due to its
greater complexity and the resulting requirement for more extensive analysis in order to
fully understand client needs.

You will also learn about trade finance where appropriate as part of an overall, end-to-end
solution. The distinction between trade finance and open account settlement is becoming
less important as supply chain finance solutions increasingly have the potential to emulate
traditional trade finance by facilitating intermediation by finance providers to mitigate risk
and provide finance. In addition, traditional trade finance solutions are becoming less
paper-dependent with the digitisation of letters of credit and shipping documents, further
eroding any clear distinction between trade finance and supply chain finance.

Conclusion

Supply chain finance is a term that describes a range of techniques and practices that
facilitate domestic and international trade. Supply chain finance is driven by events in the
physical chain relating to the movement of goods and the financial supply chain relating to
the associated processes such as purchase order confirmation and invoice issuance.

The standard market definitions provide a very broad, holistic view of supply chain finance,
which includes established finance solutions as well as much newer, technology-enabled
solutions. The distinction between supply chain finance and traditional trade finance is
becoming less relevant as technological advances enable greater digitisation of processes
and data.

Think again...

Now that you have completed this topic, how has your knowledge and understanding
improved?

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For instance, can you:

• define supply chain finance and explain why it is used;

• differentiate between supply chain finance and trade finance; and
• understand the difference between transactional finance and flow-based finance?

Test your knowledge

1. What is meant by the term ‘open account’? Select all that apply.

Select from:

A. The buyer pays for the goods in advance.

B. The shipping documents are processed by banks.

C. The shipping documents are sent direct by the seller to the buyer.

D. Goods are delivered prior to the payment being due.

E. Open account settlement is less likely to be used by companies trading

internationally.

Feedback

‘Open account’ settlement, which accounts for around 90% of international trade
transactions, never involves advance payment or processing by banks (unlike trade finance
solutions such as Letters of Credit). (See section 1.1.1.)

The correct answers are: The shipping documents are sent direct by the seller to the buyer
and goods are delivered prior to the payment being due.

2. According to the standard definitions, what is ‘supply chain finance’? Select all that apply.

Select from:

A. An approved payables product.

B. A technology platform.

C. A range of risk mitigation and finance techniques.

D. A source of finance to cover shipping costs.

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 E. A finance solution triggered by supply chain events.

Feedback

‘Approved payables’ is just one of a range of supply chain finance products and techniques.
Although technology platforms are very often used to deliver supply chain finance solutions,
they are not in themselves products or techniques. Supply chain finance covers the value of
the goods, which may, in certain instances, include ancillary costs such as shipping,
insurance and storage costs. (See section 1.3.)

The correct answers are: A range of risk mitigation and finance techniques and a finance
solution triggered by supply chain events.

3. Which are the three categories of supply chain finance outlined in the standard
definitions?

Select from:

A. Receivables purchase.

B. Overdraft.

C. Mezzanine finance.

D. Loan or advance-based finance.

E. Advanced payables.

Feedback

Overdrafts are not driven by supply chain events, although they may be used by a company
to finance trade. Mezzanine finance is a hybrid of debt and equity financing and is not
driven by supply chain events. (See sections 1.4 and 1.5.)

The correct answers are: Receivables purchase, loan or advance-based finance and
advanced payables.

4. How does supply chain finance compare with trade finance? Select all that apply.

Select from:

A. Trade finance is more likely to cover pre-shipment finance.

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 B. Trade finance always involves Letters of Credit.

C. Supply chain finance always provides the finance provider with a security interest
in the goods.

D. Supply chain finance may be flow-based or transactional.

E. Trade finance is purely a financing solution, which does not include risk mitigation
or settlement.

Feedback

There are many types of trade finance that do not involve Letters of Credit. Although supply
chain finance can provide a security interest in the goods, this will generally only apply to
inventory-based solutions. Trade finance generally includes risk mitigation and settlement,
as well as finance. (See section 1.6.)

The correct answers are: Trade finance is more likely to cover pre-shipment finance and
supply chain finance may be flow-based or transactional.

5. How does transactional finance compare with flow-based finance? Select all that apply.

Select from:

A. Transactional finance is based on individual shipments of goods.

B. Flow-based finance always provides the finance provider with the opportunity to
control each shipment and the related payment.

C. Flow-based finance is driven by transactional data.

D. Factoring is an example of flow-based finance.

E. A Letter of Credit is an example of flow-based finance.

Feedback

Flow-based solutions do not provide the finance provider with a level of control whereby
they can manage each shipment and the related payment. Letters of Credit are
transactional finance instruments. The only exceptions are standby Letters of Credit, which
may be used as default instruments supporting flow-based solutions. (See section 1.7.)

The correct answers are: Transactional finance is based on individual shipments of goods,
flow-based finance is driven by transactional data and factoring is an example of flow-based
finance.

© The London Institute of Banking & Finance 19

References
GSCFF (2016) Standard definitions for techniques of supply chain finance [pdf]. Available at:
supplychainfinanceforum.org/ICC-Standard-Definitions-for-Techniques-of-Supply-Chain-
Finance-Global-SCF-Forum-2016.pdf

GSCFF (2021) Enhancement of the standard definitions for techniques of supply chain
finance [pdf]. Available at: supplychainfinanceforum.org/2021-GSCFF-Enhancement-of-the-
Standard-Definitions.pdf

GSCFF (2022) Homepage [online]. Available at: supplychainfinanceforum.org/

ICC Banking Commission (2017) 2017 Rethinking trade & finance [pdf]. Available at:
cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf

ICC Banking Commission (2020) 2020 ICC Global Survey on Trade Finance: securing future
growth [online]. Available at:
library.iccwbo.org/content/tfb/pdf/2020iccglobaltradesurveyvweb.pdf

International Trade Administration (no date) Methods of payment [online]. Available at:
www.trade.gov/methods-payment

© The London Institute of Banking & Finance 20