Supply chain finance has gained massive popularity in recent years – and not by accident. One of the main reasons it’s becoming the preferred method for business transactions is the increasing complexity and globalisation of supply chains, which has led to longer payment cycles and increased financial risk for suppliers. As a result, suppliers are seeking ways to optimise their cash flow and reduce their financial risk, while buyers are looking to manage their supply chain more efficiently and reduce costs.
Supply chain finance in transportation
In the transportation industry, supply chain finance is particularly important because of the high costs and risks associated with transporting goods. Freight forwarding companies, trucking companies, and other transportation providers often face cash flow problems due to delayed payments from customers. This can lead to difficulties in paying suppliers and employees and can also impact their ability to invest in new equipment and technologies.
Supply chain finance in transportation works by allowing transportation providers to receive payment for their services earlier than usual. This is done by partnering with a financial institution that offers supply chain finance solutions. The financial institution provides the transportation provider with an advance payment for the invoices they have submitted to their customers. This allows the transportation provider to receive payment immediately, without having to wait for their customer to pay.
Why is Supply chain finance important for the transportation industry?
Supply chain finance is undeniably a great choice for businesses of various industries. The transportation industry, however, runs under different dynamics due to its fast-paced nature.
Although very lucrative, the transportation industry is not without faults. As a matter of fact, businesses involved in transport and logistics face many challenges.
Low-profit margins – poor cash flow management
With historically very low gross and profit margins, the transport sector has been a highly large volume industry. Accounts due and receivable balances are hence consistently quite high. It can quickly become difficult for cash flow if clients take a long time to pay their invoices (i.e. >30 days). The collection process may be delayed if the supporting paperwork for each shipment is misplaced or delayed. Collection may be postponed in the event that a cargo is damaged and there is a claim made over it.
Owners of transportation businesses must maintain aggressive accounts receivable collection procedures to guarantee prompt delivery of invoices and supporting documentation to clients, prompt receipt of unpaid invoices and supporting documentation by clients, and timely payment of invoices. It is strongly advised to send invoices and accept payments electronically. As a buyer, maintaining a good working relationship with suppliers is essential, as is making sure they receive their payments on time. Keeping a positive cash flow can be greatly aided by matching payment terms with vendors and clients.
Profit management
As we mentioned before, the bottom-line profit margins and gross margins for the transportation sector are extremely low. Therefore, it is essential that companies in this sector run as efficiently as possible. This includes efficiently managing capital assets like trucks, making sure they are used 95% or more of the time, are adequately maintained, and use the best routes to deliver goods from point A to point B. Maintaining the ideal number of trucks will also assist in minimising the cost associated with equipment licences. It also entails maintaining effective controls over indirect expenditures like taxes, rent, insurance, and human resources.
Limited capital
There are various issues facing the transport sector. Many participants are tiny sole proprietorships with limited capital. The transport industry has a high turnover rate. It is difficult for industry participants to find affordable working capital finance because of all these factors. Supply chain finance, frequently utilised in this industry for financing, might be a good choice if the circumstances are suitable (i.e., a new, rapidly expanding business).
How does the transportation sector benefit from supply chain finance?
By choosing supply chain financing, business owners can raise their company’s profitability, liquidity, and solvency ratios. Your company will become more appealing to your partners if you increase bottom-line profit, enhance the balance, and promote expansion. Additionally, it may position the business well to withstand market cyclicality, economic downturns, and the effects of fluctuating fuel prices.
Here are five (pretty good reasons) why your logistics company should opt for supply chain finance:
- Improved cash flow: Supply chain finance allows transportation companies to receive payment for their services earlier than usual, which can improve their cash flow and help to manage their expenses. This can be particularly beneficial for smaller transportation companies that may not have the financial resources to wait for extended payment terms.
- Reduced financial risk: Supply chain finance can help to reduce the financial risk associated with transporting goods. By receiving payment earlier, transportation companies can reduce their exposure to non-payment or delayed payment from customers. This can help to improve their financial stability and reduce their reliance on debt financing.
- Stronger supplier relationships: Supply chain finance can help to improve supplier relationships by providing early payment for invoices. This can help to build trust and loyalty between transportation companies and their suppliers, which can lead to improved supply chain efficiency and cost savings.
- Increased competitiveness: Supply chain finance can provide transportation companies with a competitive advantage by allowing them to offer extended payment terms to their customers. This can help to attract and retain customers, particularly in a highly competitive industry like transportation.
Final thoughts
To sum up, supply chain finance is an important financial tool for transportation providers looking to optimise their cash flow and improve their supply chain efficiency. By partnering with a financial institution that offers supply chain finance solutions, transportation providers can reduce the risk of delayed or non-payment from customers, improve their cash flow, and gain a competitive advantage in the marketplace.
