A thing that Jiang Guohui often thinks over is how to reduce the occupied accounts receivable so as to solve the deficiency of funds encountered by SMEs at the sales ends of supply chains.
As a senior customer manager of Industrial Bank (IB) Zhongshan Branch, Jiang Guohui, during the process of handling the business of supply chain finance, discovers that an increasing number of core enterprises of supply chains are changing their original business model. They adopt the policy of purchase on account, leading the funds of these enterprises to be occupied for a longer period and even affecting their fund flow. As for such enterprises, the financing demand is pressing.
Considering the trouble encountered by these SMEs, IB analyzed the trading factors between the downstream and upstream of industrial chain such as trading counterparts, settlement method, sale-on-account period, and trading frequency and established the “pond-based financing” model for accounts receivable linking SMEs and core enterprises, which not only meets the demand of core enterprises for purchase on account, but also enables SMEs to receive their accounts receivable in advance. The core enterprises and SMEs on industrial chain then could both benefit from such financing method, which truly brings multi-win results.
Linking both upstream and downstream of supply chain
Zhongshan of Guangdong Province is an important economic city in the Pearl River Delta and one of the districts with active private economy in China . The flexible business models of private enterprises in the city require banks to provide a greater number of individualized financial products.
Targeting at the market characteristics of Zhongshan – a large number of small- and medium-sized private enterprises and developed private economy, after two years' exploration, IB Zhongshan Branch has accumulated rich experience in such areas as helping manufacturers or suppliers to shorten the occupation period of account receivable and solve the financing difficulty of SMEs on supply chain.
In 2010, IB Zhongshan Branch established business relation with Shenwan Town Tianxi Electrical Appliances Co., Ltd. (hereinafter referred to as “Tianxi”) for the first time. Mainly engaging in production, processing and marketing of electrical appliance fittings, Tianxi is an upstream enterprise on the supply chain with China Shipbuilding Industry Corporation (CSIC) at the core. It purchases copper cathodes from Guangdong Yangdi Industry Co., Ltd., and after production and processing, sells its products to CSIC Guangzhou, a state-owned enterprise. Due to the sale-on-account model, it has a long recovery period for its sales payment, but a large amount of money is required for purchasing raw materials and carrying out production and processing. Along its development and expansion of production, Tianxi faces a rising pressure of fund flow. Nonetheless, due to the lack of sufficient guarantees and pledges, it is very difficult for the company to get the support of conventional mortgage credit from a bank.
After learning the above situation, IB analyzed the characteristics of the supply chain of Tianxi, where Guangzhou Yangdi stays upstream and CSIC Guangzhou downstream, considering the background of the company as a trading enterprise in the circle of real economy, and on that basis, proposed the financial service solution to extend credit to Tianxi with its accounts receivable as the pledge.
Specifically, Tianxi used the accounts receivable from CSIC Guangzhou as the pledge, and IB provide financing service at a certain proportion of the accounts receivable. In this way, Tianxi got some sales payment in advance. After receiving the credit funds from IB, Tianxi could purchase raw materials from Guangzhou Yangdi for succeeding production and processing. In the business, Tianxi transferred its account receivable to IB for management, and IB provided such services as managing and expediting the accounts receivable. As the downstream enterprise of Tianxi is CSIC, an enterprise with good credit standing that has never delayed the sales payment or had bad debts. Such trading factors coincide with the required properties of IB's supply chain finance.
In the traditional credit business, a bank will focus on the asset scale, overall asset-liability performance and general credit standing level of a financing enterprise. However, the accounts receivable financing model of IB is based on the trading contract of enterprises and depends on whether relevant trading factors, including credit standing of the trading counterpart, sale-on-account period and settlement method, meet relevant requirements of the supply chain financing.
“The buyer of the products of Tianxi is CSIC, an enterprise with great strength and high credit rank that can make payment on time. Therefore, with the accounts receivable of the company being used as the pledge, the recovery of funds can be guaranteed, and the high security of funds will bring low loan risks to the bank”, said Jiang Guohui.
With the support of accounts receivable financing model of IB, Tianxi solved its problem of fund flow, and enlarged its production and sale scales at a fast rate, with its annual sales volume growing from less than RMB 400 million in 2010 to RMB 700 million now and its production capacity increasing to RMB 1.2 billion.
Pond-based financing with accounts receivable
At present, supply chain financing products with controllable risks and high liquidity that meet the needs of customers have become a major orientation for banks to innovate in corporate credit products and an important carrier and platform for banks to provide working capital support to SMEs. It is reported that IB promotes supply chain finance as a key corporate finance business, involving such industries as construction machinery, electrical appliance, bulk commodity, non-ferrous metal, ferrous metal, and paper making.
As an important product of supply chain financial service, the model of pond-based financing with accounts receivable (hereinafter referred to as “pond-based financing”) launched by IB facilitates the financing of SMEs on supply chain.
What is “pond-based financing”? Jiang Guohui gave the following example. Suppose A company with an annual sales volume of RMB 70-80 million has dozens of dispersed downstream buyers. By way of “pond-based financing”, all the accounts receivable of different amounts and terms from dispersed buyers can be pooled into a “pond of accounts receivable”. By controlling the amount and payment of the pond, IB provides financing support to the enterprise.
“IB proposes that the accounts receivable of A company can be collected together to form a pond of accounts receivable. A bank can sign a contract with the company to set the “bottom line” of the pond, (for instance, the minimum amount of the entire accounts receivable is RMB 50 million), and the bank may, after examination, approve a loan of RMB 35 million to A company finally at a certain pledge ratio. A company shall, under the contract, warrant that the amount of money in the pond of accounts receivable plus the aggregated amount of payment security deposit at each time point can meet the required minimum amount of IB.” Jiang Guohui said, although the pond of has new accounts receivable come in and old accounts receivable be paid like a water pond with water coming in and going out, we can ensure the security of banking funds if the water in the pond can be kept above the required minimum amount. In this way, IB has solved the problem of accounts receivable encountered by many enterprises by promoting the “pond-based financing”.
Jiang indicated: “The innovation of IB in the products of supply chain finance is based on the management of the actual needs of customers and the trading links”, with a view to solving problems of customers and controlling the risks. The “pond-based financing” business released this time is only a product in the prepayment category of IB's supply chain finance. Moreover, IB also has a range of innovative product portfolios and business schemes regarding accounts receivable, which can effectively solve the problem of accounts receivable encountered by enterprises.”