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Supply Chain Financing Programs Help Build Relationships

By Sebastian Kreis - Xepelin
CEO & Co-Founder


By Sebastian Kreis | CEO - Thu, 02/02/2023 - 16:00

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In Mexico, small and medium-sized enterprises (SMEs) make up around 95% of businesses  and employ around 60% of the country's workforce. However, these businesses often face  challenges in accessing payments on time, due to movements in supply chain payments,  and financing, due to a lack of collateral and a limited credit history. Digitalization has  allowed, in recent years, an increase in the scope of financing; however, many of these options are still characterized by high interest rates.High inflation adds to these  challenges, since it hinders the growth of many businesses. Certainly, the strength of  companies’ supply chains can be weakened by the operational problems caused by the gap in aggregate supply and demand that prevails in the market. 

As a result, payment issues can be a common source of tension and strain in supplier  relationships for corporate enterprise companies in Mexico. This can lead to several problems, such as reduced quality of products or services and delayed deliveries and  production schedules, things that can happen as a result of  operational problems due to lack of  working capital, or if the supplier feels undervalued or that it is not being treated fairly. Also, cost  increases, often incurred by the supplier, are  indexed in the final sale price that finally will make the corporate enterprise less competitive. 

One way these companies can improve their relationships with their suppliers and  strengthen their supply chain is by implementing factoring and supply chain finance  programs. Factoring is a financing option in which a business sells its outstanding invoices  to a financial company in exchange for immediate payment. Supply chain finance programs  work under the same principle and deliver greater confidence in the process for both sides  as well as improved conditions, due to an agreement between the payer and the financial  company. 

Supply chain finance programs can provide benefits to both the enterprise company and its  suppliers. For the suppliers, these programs can provide much-needed working capital and  improve cash flow. This can be especially beneficial for small and medium-sized suppliers  in Mexico that may have limited access to traditional financing options, which are also more expensive because companies commit for 18- 24-month financing terms, making the financing cost three to four times more to solve the same problem. Access to financing is a major challenge for small businesses in Mexico, with around 80% of small business loan applications being rejected by financial institutions. The average payment turnaround time for a discounted invoice is around three days, compared to ranges from 30 to 90 and up to 120 days for an invoice that is paid directly by the payer. 

For enterprise companies, these programs and agreements also bring several benefits. A  high percentage of SMEs generally supply large companies and thus  contribute to strengthening local economies to the extent of better planning and  organization in their finances, with orderly flows that allow them to be key players in expanding the ecosystem to new markets and customers.

With nearshoring on the rise, to move the supply chain forward and along a safe path,  it must have supplier companies that can envision a future with certainty, capable of  generating jobs and offering the best quality products. This will translate into profitability and  access to fresh resources that are ready for reinvestment. With the above, companies can better plan each of the processes required within an organization, ensuring their production and delivery on time with products that will leave customers satisfied. 

By providing these suppliers with access to working capital through supply chain finance  programs, big companies in Mexico can help to support their growth and development. By  fostering strong, reliable relationships with its suppliers, the enterprise company can ensure  a consistent flow of goods and services, which is essential for meeting customer demand and maintaining a competitive edge. It's well known that companies with strong supplier relationships are more likely to experience increased innovation, higher profits, and faster growth. 

One way that supply chain finance programs can be made even more effective is by  leveraging technology for risk and operational underwriting at scale. With data models and  machine learning algorithms, it is possible to accurately assess the creditworthiness of  customers and suppliers, reducing the risk of non-payment. And by using a digital platform,  it is possible to streamline the process of requesting and approving payment, making it  easier and more convenient for all parties involved. 

In these times of high interest rates, where access to liquidity is reduced, supply chain finance programs can be powerful tools for enterprise companies in Mexico looking to improve their relationships with their suppliers and strengthen their supply chain, leveraging technology for improved performance and experience. Ensuring suppliers' cash flow health is no longer a nice to have but mandatory to secure supply chain reliability.

Photo by:   Sebastian Kreis

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