BOM Buyer

BOM Buyer

BOM Buyer: What’s the difference between Inventory Control & Finance (ICF) vs Supply Chain Finance (SCF)?

Traditional invoice factoring or receivables financing is a post-shipment invoice-accepted model. In this model:

  • The financier provides 80% or 90% of the face value of the invoice to the seller and the remaining on final payment by the buyer (minus a discount fee).
  • The financier needs to ensure that (a) The receivables are ‘perfected’ (i.e. do not have any liens, etc. and (b) The buyer has ‘accepted’ to pay the invoice and there are no disputes.

Our BOM Buyer is a completely different way of freeing up capital in the supply chain that turns inventory into financeable assets. A special purpose vehicle governed by a smart contract takes ‘title’ to the inventory, offers Buyers and Suppliers favorable payment terms, reduces the cost of financing for Suppliers and COGS for Buyers.

There are four main benefits to the BOM Buyer:

  • Lower COGS for Buyers and lower financing costs for Suppliers, compared to traditional supply chain finance
  • Can offer all Suppliers access to the Buyer’s cost of capital, without affecting the Buyer’s credit or having to draw from the Buyer’s credit facilities
  • Ensure a much more financially healthy supply chain with minimal excess inventory on balance sheets, resulting in earlier revenue recognition for Suppliers
  • Grant Buyers greater visibility and control over their supply chain with new data shared on the blockchain

Compared to traditional receivables financing, the BOM Buyer can save 0.50% to 2.50% or more on an annual basis.

What does a typical BOM Buyer deal look like?

  • Four parties: a Buyer, a Supplier, a Special Purpose Vehicle (can be owned by Skuchain, a bank or by the Buyer) and a Bank
  • Five steps:
  • A Special Purpose Vehicle enters into a JIT sales agreement with the Supplier, and the Buyer assigns their right to make payment and receive title to the inventory from the existing Master Purchase Agreement with the Supplier.
  • A Buyer offers a payment guarantee for any inventory that is part of this deal, subject to quality control, performance, etc.
  • A Bank will fund the SPV at the Buyer’s cost of capital in anticipation of a deal.
  • The SPV will buy inventory from the Supplier at a discount equal to the financing rate, and pay at terms advantageous to the Supplier.
  • The SPV will sell the inventory to the Buyer, possibly at a lower price than the face value of an invoice, and receive payment at terms advantageous to the Buyer.

How do I get started?

BOM Buyer financial transactions can be folded directly into an existing flow of funds or workflow in the supply chain.

Any user can go into the BOM Buyer and write these workflows.

How do I plan and negotiate a financial transaction?

A party to a financial transaction can use the BOM Buyer to plan the terms of that transaction and submit a proposal to the counterparties.

The parties can then negotiate the proposal directly on the platform. The history of deal documents and proposals can be referenced at any time.

Financing terms have been set. What now?

Once financial terms are agreed to, they are executed via smart contracts.

A financing can apply to one transaction or multiple transactions as part of a master purchase agreement.

What does Blockchain bring to this kind of financing?

1

Secure attestations allowing for ease of transmission

By placing agreements and trade documentation on the Blockchain, we provide a secure and trustable medium to transmit the details of a trade to various parties.

This allows for portability of transaction information.

2

Reduced operational friction

  • The investment to make any change in supply chain process is small.
  • Supply chain partners are still able to hide information they don’t want to share with others
  • The ecosystem can have transparency and visibility to the extent necessary to get the best risk profile and lowest cost for financing.
3

Significantly reduced workload

Operators who had to search for, compile and share the same information over and over again to banks, credit insurance companies and transaction participants are now able to streamline the process while adding security.

The transaction process is standardized. There is no need to do an in-depth evaluation of each new transaction.

4

Scalability and additional profit opportunities

Allows for buyers and suppliers to participate and run transactions of any size on the same platform. Multiple tiers can now be included in the same ICF program, whereas only single tiers could participate before because of the expense and lack of visibility.

5

Perpetual audit system

All aspects of the trade are now available to be audited in real time by the appropriate parties.

6

Traceability

Applicable SKU level traceability can be made available to relevant parties in real time.

What risk factors are there, and how does the BOM Buyer mitigate them?

Risk Mitigation Strategy
Credit and Performance
  • Payment reliant on investment-grade buyer
  • ‘Take or Pay’ Agreement with buyer before purchase
  • Buyback Agreement with the supplier
  • Clean chain of title attested to on the blockchain and verifiable by all parties
  • IMT buys the assets and mitigates credit risk through credit insurance
Interest Rate and Liquidity
  • Short-term transactions that are match funded
Insurance
  • Verified coverage of relevant risks (marine, transport, liability…)
Inventory
  • Commercial Dispute Risk indemnified by the supplier
  • Warranty and Product Liability remain the responsibility of the supplier
Price
  • Can be allocated among parties or outsourced to a commodities trading house. The SPV will not take this risk.
Scalability
  • A blockchain platform allows financing operations to be digitized and automated, significantly
  • cutting down on cost of financing and credit insurance and
  • eliminating the need for per-transaction approval.

What else can the BOM Buyer do?

Deep Tier Financing

The BOM Buyer can turn a Purchase Order into a Distributed Ledger Payment Commitment (DLPC) that suppliers can use to obtain working capital relief during the production process at the end Buyer’s cost of capital. The DLPC may be first assigned to a supplier, and then a bank, to secure the financing. For Tier 2 suppliers and suppliers further upstream, the amount of the PO that may be financed will be determined by the bill of materials for the finished good.

CoverI (for Credit Insurance)

Skuchain’s credit insurance platform, called CoverI, offers a buyer of insurance their own marketplace for putting together policies through a syndicate of insurance companies. CoverI manages the bidding and negotiation process for a new policy. Once such a policy is in place, CoverI allows a company to upload information to the blockchain about performance history on the policy. This information will offer greater visibility to insurance companies about the ongoing risk of policy and open the possibility of much more efficient and dynamic pricing of risk and insurance structures over the life of the program. At the same time, the ability to share this transaction information will dramatically reduce the costs to insurance companies of verifying and paying out a claim, as well as collecting on the defaulted amount from the counterparty.

WIP Financing (Work in Progress Financing)

The BOM Buyer is extendible across the supply chain and can cover the financing of inventory as it goes through the production process.

Distribution Financing

Instead of financing their suppliers, buyers can obtain financing for themselves as they sell their products in the market across variable distribution channels.

Disclaimer: Nothing on this website constitutes legal or financial advice. To fully understand the financing structure and legal terms that are the best fit for your needs, please consult your own professional advisers.

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