Supply Chain Financing Malaysia
Many businesses are now taking advantage of supply chain finance to improve their working capital, build stronger supplier relationship and reduce supply chain risk. But what is supply chain financing and how does it work? Get an overview and how you can benefit from supply chain financing Malaysia.
What is Supply Chain Financing?
Supply Chain Finance (SCF) – is a way of offering your suppliers early payment in a form of a third party-funded solution. That means your supplier will typically be able to receive funding at a more favorable rate than they can achieve independently. Supply chain finance is usually an off-balance sheet solution, although SCF programs do need to be structured in a way that they are not classified as debt (Taulia, 2020). Supply chain finance connects buyer and suppliers with financing institutions. As a results, it helps to corporates to lower financing costs and improves efficiency. Most importantly, it unlocks working capital tied in the supply chain (Velotrade.co).
Everyday companies rely on working capital to pay for strategic initiatives during this challenging economic times. If you’re a large supplier with an investment-grade credit rating, you may have already access to multiple financing options. However, for non-rated grade suppliers, the options aren’t as plentiful. The cost of funds in traditional commercial lending scenario can be extremely high for these businesses. Traditionally, supply chain finance hasn’t been an option for smaller suppliers because bank-led program are engineered to serve investment-grade program participants. Fortunately, this is changing. Now, non-investment grade suppliers have access to the benefits of supply chain finance (Nathan Feather, 2022).
Benefits of Supplying Chain Financing Malaysia
- Improving working capital position – buyer can benefit from longer payment terms and an improved cash conversion cycle.
- Reducing supply chain risk – by supporting your suppliers with affordable financing, you can reduce the risk of disruption to your supply chain.
- Strengthening supplier relationships – Helping your suppliers improve their working capital can be a powerful tool in building stronger relationships.
- Gaining an advantage of negotiations – offering suppliers supply chain finance may also give your procurement team an advantage when negotiating commercial terms.
- Supporting business growth – SCF puts your supply chain in a better position to accommodate an increase in business. It may also help your suppliers invest in R&D, which ultimately will benefit your business.
- Working capital benefits – by taking advantage of early payment, suppliers can reduce their days sale outstanding (DSO), therefore improving their working capital position.
- Lower cost of funding – supply chain finance is based on buyer’s credit rating – so the supplier cost of financing is lower than for solutions such as factoring.
- Improved cash flow – cash flow improvement means suppliers will be in a better position to expand their businesses.
- Better cash flow forecasting – a solution which offers greater certainty over the timings of payment can help suppliers forecast their cash flow more effectively.
- Access to a user-friendly platform – give suppliers full visibility over the payment process.
SMEs Can Now Tap Supply Chain Financing Malaysia
In the face of new challenges triggered by the pandemic, businesses, particularly small to medium-sized enterprises must go on to ensure their financial stability, struggling with limited capital. This causes severe restrictions to develop. According to News Strait Times May 2021, The Global Working Capital Study (2018/19) showed that was up to RM6 trillion in potential monetary value to be accessed by eliminating weak management of working capital in companies. The analysis indicates that through a stronger balance sheet and better liquidity management, Malaysian firms can account for RM110 billion of financial opportunity. This is when Supply Chain Finance (SCF) comes in. SCF allows for optimal financial and operational efficiency, and provides the option of delayed terms of payment from buyers to suppliers, while large firms and SME suppliers can still receive earlier payment.
MoF launches National Supply Chain Finance Platform to Assist Malaysian SMEs
The Ministry of Finance have finally launched the National Supply Chain Finance platform, dubbed as “JanaNiaga”, with an aim to assist small and medium enterprises (SMEs) in maintaining a healthy cash flow while also limiting credit risk to financial institutions in Malaysia. The programme is a national initiative by the ministry to help SMEs finance their dealings with public institutions and government-linked companies, as part of the government efforts to alleviate economic struggles. Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said, the “JanaNiaga” platform will be led by the Export-Import Bank of Malaysia (EXIM Bank), with the involvement in several financial institutions in Malaysia, as previously announced during Budget 2021 in November last year. To kickstart the programme, an allocation of RM300 million has been provided by EXIM Bank to mobilise “JanaNiaga” (theedgemarkets.com July 2021).
To understand more about JanaNiaga and how it can support Malaysian SMEs, click here.
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