Inventory Control & Finance
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 ICF product 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 ICF:
- 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, ICF can save 0.50% to 2.50% or more on an annual basis.
Compared to Letter of Credit financing, ICF can save 50% of cost and time through lower issuance commissions and elimination of bank document handling.
Can I use ICF as an alternative to a Letter of Credit?
Yes. There are many ways for a Buyer to issue a Distributed Ledger Payment Commitment (DLPC) on our ICF product in lieu of a Letter of Credit or other traditional trade instruments. Below is one example of such a structure. For more information on the DLPC, follow this link.
What does a typical ICF deep-tier deal look like?
Supplier:
Encrypts each field of EDI documents such as PO, ASN & Invoice, and chooses which fields the buyer gets to see.
In return, they get early payment based on the buyer’s cost of capital.
Buyer:
Provides a DLPC (Distributed Ledger Payment Commitment) that becomes effective after QA & removal of performance risk.
In return, they get real time visibility & control over inventory in the deep-tier for an agile, efficient supply chain.
What does a typical ICF buy-sell 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. This payment guarantee becomes a DLPC on the blockchain.
- 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.
What is the DLPC?
- DLPC ID: Unique identifier for the DLPC record.
- Originator ID: An identification of the originator of the proposed DLPC.
- Reference ID: Identification of the trade instrument to which the DLPC is linked, if it exists.
- Committer: Identifier of the party making the commitment.
- Committee: Identifier of the party benefiting from the commitment.
- Currency
- Amount: The currency and amount committed to.
- Initiation Date: The date on which the terms of the DLPC are set.
- Due Date: On demand, or the date specified or determinable on which the committed amount must be paid.
- Commitment State: Initiated, Contingent, Effective, Discharged.
- Discharge State: Open, Paid, Past Due, or Cancelled.
- Discharge Date: The date upon which the DLPC has been paid or cancelled.
- Applicable Rules: A description and version of the rules governing the DLPC.
The Distributed Ledger Payment Commitment (DLPC) is:
- A standardized format for a payment commitment on a blockchain network. Since it has 1) legal backing and 2) represents monetary value based on a negotiable instrument, it can be assigned and distributed to third parties and is sufficient to trigger payment.
- The only global standard and best practice for payment commitments on the blockchain. It was published by the Banker’s Association for Finance & Trade (BAFT), the largest trade association for transaction banking. Skuchain has co-chaired the DLPC working group at BAFT since its inception. The working group consists of blockchain companies, other trade technology platforms and 18 of the largest commercial banks.
For further information, please refer to the current business and technical best practices for the DLPC
The four ways for a Buyer to originate a DLPC:
- A Buyer could attach a DLPC to a Purchase Order (+ a Bill of Materials for deep-tier financing) and associate a set of smart contract governed conditions that trigger the commitment.
- Once a Buyer approves an invoice with a Tier 1 Supplier, this approval can be turned into a DLPC on the blockchain that provides a liquidity pool for the deep-tier.
- A Buyer could provide a Take or Pay contractual guarantee that will backstop a specific purchasing line, turning all its POs for that line into DLPCs.
- A Buyer can ask its bank to issue a DLPC in lieu of a traditional Letter of Credit.
How do I get started?
ICF transactions can be folded directly into an existing flow of funds or workflow in the supply chain.
Any user can go into ICF and write these workflows.
How do I plan and negotiate a financial transaction?
A party to a financial transaction can use ICF 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.
Introducing Skuchain’s DLPC CorDapp
DLPCs maintain a history of all actions that have taken place on it. Each action carries with it the appropriate signatures, origin triggers and relevant antecedents for the CorDapps and observers to verify its authenticity.
Skuchain’s DLPC CorDapp is the first implementation of the DLPC standard and interoperability between a Hyperledger Fabric network and the Corda Network.
Enterprises running nodes on the Skuchain EC3 Fabric network submit Purchase Orders from Buyers to Suppliers with directives to create a DLPC for placement on Corda Network.
This is done either via an API call and/or a UI that takes in user input.
The DLPC document has a set of fields based on the best practices published by BAFT. The carveout of the DLPC processes each individual field in the PO and produces a DLPC object, which is sent to Corda Network with the following additional information:
- Public keys of signatories and the ID service provider
- The signed transaction so CorDapps can the record
- Smart contracts, triggers, rules and other relevant information
An overview of Fabric and Corda interoperability
- Buyer submits PO with a DLPC attachment directive.
- All nodes on the Fabric network receive the submitted PO.
- The Fabric anchor node receives the submitted PO with DLPC directive, carves out the DLPC and submits to the Corda Network.
- The Corda Network has the DLPC signed by the Buyer as Committer.
Further actions on the DLPC can be undertaken by the EC3 Agent Node, which acts on behalf of participants who do not have a Corda node, or a counterparty’s Corda node.
What does Blockchain bring to this kind of financing?
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.
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.
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.
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.
Perpetual audit system
All aspects of the trade are now available to be audited in real time by the appropriate parties.
Traceability
Applicable SKU level traceability can be made available to relevant parties in real time.
What risk factors are there, and how does ICF mitigate them?
| Risk | Mitigation Strategy |
|---|---|
| Credit and Performance |
|
| Interest Rate and Liquidity |
|
| Insurance |
|
| Inventory |
|
| Price |
|
| Scalability |
|
What else can ICF do?
Deep Tier Financing for Working Capital
ICF 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)
ICF 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.
Explore Our Projects
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.