In recent years, the concept of supply chain finance has gained significant attention within enterprises, banking institutions, and regulatory policies across the globeBut what exactly does supply chain finance entail? Why is there a growing emphasis on developing this specific financial approach? And why is it increasingly spotlighted within the existing framework of financial products?

Since the reform and opening-up policy was implemented decades ago in China, the country's financial system has reached impressive heightsWith the total assets of the financial sector, the number of banking institutions, and China's ranking in global banking, it’s clear that the financial landscape has matured considerablyFinancial services have permeated various levels of the economy, seemingly offering adequate support to enterprises with financing needsHowever, despite the multitude of banks competing intensely for suitable business opportunities—a phenomenon that has become common knowledge among the public—one critical issue within the financial service system remains unresolved: the financing difficulties faced by small and medium-sized enterprises (SMEs).

The Financing Struggles of SMEs

The financing struggles of SMEs in China persist as a long-standing challenge that urgently needs to be addressed

Typically characterized by "five, six, seven, eight, nine," SMEs contribute over 50% of the country's tax revenue, 60% of GDP, 70% of technological innovation, and account for 90% of all companies, playing an essential role in national economic growth and societal developmentThey are crucial to job creation and improving the living standards of the populaceDespite their substantial contributions, SMEs do not receive adequate credit support from the financial systemBy the end of 2023, while SMEs generated more than 60% of China's total economic output, the funding they received amounted to only about 30% of the total financing volume available in the country.

The challenges SMEs face in securing financing stem from various practical issuesBanks set several stringent conditions that enterprises must meet to qualify for loansFor example, SMEs typically must be operational for at least two years, have a flawless credit track record, and a particular scale of operations

• Global Economy Faces Stagflation, Rising Financial Risks
• ECB Cuts Rates by 25 Basis Points for the Fourth Time
• Rumble Soars Over 81%
• Financial Resources Flowing More to Key Sectors
• X.Game Fuels Innovation in Ethereum Ecosystem

To secure financing, SMEs are usually required to provide suitable collateral, submit tax declarations for the previous year, provide proof of no tax arrears, and present detailed financial audit reports for the last three yearsAdditionally, proofs of operational cash flow and a financing report for the past year are often required.

Given these banking requirements, it is evident that many SMEs struggle to fulfill themOften characterized by their smaller size, weaker competitive edge, and a lack of robust management, many SMEs also exhibit a lack of transparency in their financial operationsGenerally, they possess limited risk-bearing capacity and lack well-structured internal control systemsFurthermore, the mechanisms for managing collateral and guarantees in the financing system are not yet fully developed in China, leading to considerable challenges for SMEs in securing financing.

The Essence of Supply Chain Finance

Larger enterprises, in stark contrast to SMEs, enjoy considerable financial support from institutions

Due to intense competition among banks, these large companies often find that their banking credit lines remain underutilized, leading to an oversupply of credit for themThese large enterprises typically occupy pivotal positions within the supply chain and can be classified as core enterprisesIf the financing support harnessed by these core enterprises could be efficiently transferred to SMEs, the financial backing received by both core and small enterprises could achieve a more balanced distribution.

Exploring the intrinsic connections between core and SME enterprises reveals that while large companies manage vital nodes in the supply chain, they require numerous supporting firms to function effectivelyAs the number of these supporting entities increases, the supply chain becomes more fragmented, with many small players involvedBy leveraging the creditworthiness of core enterprises along the supply chain, financial resources can be extended to meet the financing needs of SMEs

In this manner, the credit provided by core enterprises acts as a bridge to enhance the financial capability of SMEs, effectively alleviating their financing challenges.

The trust and support offered by core enterprises to SMEs can be facilitated through the mechanisms of financial flow, logistical flow, and information flow established among the companies along the supply chain.

Who Drives Supply Chain Finance Development?

The supply chain consists of various participants, and it is essential to recognize that different parties take the lead in organizing the financing models surrounding supply chainsThe five primary models include those led by commercial banks, core enterprises, e-commerce platforms, logistics companies, and integrated management platforms.

Given that supply chain finance is a financial construct, the most critical service model is the commercial bank-led supply chain finance platform

A growing number of banks are constructing digital platforms for supply chain finance, enabling the integration of operating data—such as settlement processes, order management, and financial oversight—through these platformsLogistics processes are also being enhanced through offline terminal devices that realize full lifecycle controlAdditionally, blockchain technology is being introduced to manufacture blockchain-powered supply chain platformsCommercial banks facilitate enterprises in accessing financing options via accounts receivable financing, electronic payment certificates, or digital credit verification through these platforms.

The expansion of e-commerce platforms has transformed them into vital components of society’s product supply chainsThese platforms are increasingly utilizing supply chain finance scenarios to provide financial services to their suppliers and related participants

Given the vast array of transaction data, platforms have insights into customer credit profiles and often possess integrated logistics frameworks, allowing for the creation of e-commerce-based supply chain finance platformsFor instance, JD.com’s financial services arm can offer accounts receivable financing and other services to its self-operated suppliers through its platform.

Another significant supply chain finance scenario is the comprehensive management platform, exemplified by entities like Zhongqi Yunlian and JinwangluSuch platforms are typically initiated by large state-owned enterprises, representing active engagement from core enterprises aimed at realizing supply chain financing relevant to their business ecosystem.

On these integrated platforms, the critical arrangement involves the transmission of credit from core enterprisesOn platforms such as Zhongqi Yunlian, this transmission occurs through a framework called "Yunxin," while on Jinwanglu, "Hangxin" is employed

By enabling the payments owed by core enterprises to be crafted into a credit form for other businesses in the supply chain, these comprehensive management platforms facilitate the flow of credit, making it accessible to SMEs for streamlined financing solutionsSupported by robust financial technology, the ultimate goal of these integrated platforms is to create a closed-loop ecosystem connecting production and finance.

How is Supply Chain Finance Realized?

Supply chain finance can be defined as a financial service mechanism that leverages the payment cycles established by core enterprises during transactions with their upstream and downstream counterparts, enhancing financing for these upstream and downstream businesses.

Initially, along the supply chain, core companies often have payable accounts owed to their upstream suppliers due to extended payment terms

These payables represent debts the core enterprise owes to its suppliers and can serve as a reliable credit guarantee for financing supportThis essentially translates to transferring the superior credit status of core enterprises to their suppliers through accounts receivable financing.

For example, a manufacturer of high-speed train carriages, such as CRRC, owes payments to suppliers of train seats, which can be leveraged by banks offering financing to the seat suppliers as a credible assurance of repaymentThus, the financing acquired by upstream SMEs—through accounts receivable from core enterprises—effectively channels high-level credit through the supply chain, making accounts receivable financing a principal asset class within supply chain finance.

Secondly, at the downstream end, core enterprises may receive advance payments from their downstream distributors

This can lead to a scenario where these downstream companies (many of which are SMEs) park their funds with the core enterprise in the form of advance paymentsIf the core enterprise synthesizes these advance payments into a trust mechanism, it establishes a second asset class for supply chain finance based on advance payment financing.

An example is a primary distributor of Moutai who pays the brewery in advance for their ordersFinancial products within the supply chain finance system can use these prepayments to offer financing solutions anchored on the value of advance paymentsWhile the guarantee value is not as straightforward as accounts receivable, it can nonetheless indicate the business health of downstream distributors and represents a canalization of financial resources based on the core enterprise's fund flow.

The aforementioned two asset classes—accounts receivable and advance payments—form the bedrock of supply chain finance along with inventory-based assets

Inventory-based assets enable logistics, such as warehouse receipts from non-core enterprises, to act as collateral for financing support for SMEsHence, the trio of accounts receivable, advance payments, and inventory forms the three principal business models of supply chain finance.

It is vital to recognize that both upstream and downstream suppliers of core enterprises can include multiple layers, such as suppliers to suppliers or secondary distributors below primary distributorsBy employing the mechanisms described above, core enterprises can instigate their credit through various channels throughout the entire supply chain, capable of providing enhanced financing options for SMEs and other non-core enterprises.

Ultimately, it becomes evident that supply chain finance harnesses the inherent relationships among various enterprises within the supply chain, utilizing the larger and core enterprises to enhance credit access for smaller businesses