As upstream and downstream SMEs on a supply chain usually stay at a disadvantaged position due to their limited strengths, they have to make concession on collection of sales payment, thus facing great pressure in their cash flow. When such enterprises decide to enlarge their business scope to seek further development, capital is usually their insurmountable bottleneck. How to solve financing difficulty is the key that decides whether such enterprises have more rooms to develop or not.
“We develop supply chain financing business and combine core enterprises and upstream and downstream enterprises of supply chains with our bank together effectively to achieve win-win results”, said Wang Zhili, Director of No.2 Corporate Finance Department of IB Shijiazhuang Branch to the reporter. Through providing advance payment financing, stock-in-trade financing and integrated supply chain financing of “advance payment + stock-in-trade”, Industrial Bank (IB) assists upstream and downstream enterprises of supply chains to break through financing bottleneck, thus relieving their working capital pressure, promoting commodity trading successively and orderly in the whole industrial chain, and strengthening the competitiveness of core enterprises and upstream and downstream SMEs.
Advance payment financing achieving leverage purchase
Hebei Iron & Steel Group Co., Ltd. (hereinafter referred to as “Hegang Group”), which had been established by combining former Tangshan Iron & Steel Group and Handan Iron and Steel Group, produced 44.36 million tons of crude steel in 2011, ranking No.1 at home and No. 2 across the world. The group became one of the Global 500. Running iron and steel as its principal businesses, the group has its businesses across five fields including iron and steel, resources, manufacturing, finance and logistics. It has 16 subsidiaries and branches including Tangsteel and Hansteel. Centering on the Hegang Group, a large number of upstream and downstream enterprises constitute a massive supply chain, and correspondingly, they are in pressing need of supply chain finance services.
At the end of 2009, IB Shijiazhuang Branch began to contact with Hegang Group, designing a tailored supply chain financing service solution around the industrial chain centering on the group.The solution was designed on basis of analyzing the trading elements, including trading history, methods of settlement and ways of delivery between Hegang Group and downstream distributors, to give credit support to Hegang Group and the upstream and downstream customers. In addition, the bank solved the financing difficulty of relevant enterprises in the supply chain with a dozen of standardized advance payment financing businesses including confirmation warehouse, manufacturer-distributor-bank financing, domestic buyer credit, domestic order financing, advance payment financing for auto distributor, and domestic letter of credit.
It is reported that, as to downstream distributors, Hegang Group adopts the method of settlement and payment by “goods after payment”, that is, Hegang Group will not place the order and start production until the downstream distributors pay the money for purchasing goods of the next month at the end of this month to the account of Hegang Group.The method of settlement and payment poses great capital pressure on the downstream distributors or enterprises engaging in iron and steel manufacturing and trading because capital chain is usually very tense. Therefore, as soon as an enterprise wants to enlarge its business scale, it will often encounter the problem of capital shortage.
In the past, enterprises would generally seek loan support from banks and apply for traditional working capital loan to make the advance payment. However, with many restrictions, such loans often require enterprises to provide the pledge or guarantee in full, which would be very difficult for those SMEs in the supply chain. Therefore, more and more enterprises usually have to give up enlarging their business scale due to financing difficulty.
The supply china financing service solution offered by IB brought hopes to them. Different from the above working capital loan, the supply chain advance payment financing of IB is mainly based on the analysis and control of trading elements, and has relatively low requirements for mortgage and guarantee.
Wang Zhili said: “IB provides supply chain advance payment financing services to Hegang Group and its upstream and downstream enterprises in the following way. The bank provides supply chain advance payment financing services, such as confirmation warehouse, manufacturer-distributor-bank financing, to them at the link that downstream distributors purchase goods from and place orders to Hegang Group, and directly pay the money to the group, who deliver goods to designated places and consignees in line with the instructions of our bank; if supervision is required, the supervisor also supervises the goods according to the instructions of the bank.”
In the advance payment financing model, IB provides financing to downstream enterprises by depending on the credit standing of the core enterprise and controlling over the trading elements on a supply chain, and directly pays the financing funds to the upstream core enterprise. For the downstream distributors, IB provides them with financing convenience, solve their financial difficulty and help them to extend their sales scale. Meanwhile, in some transactions of commodities, discounts may be available to the advance payment in the purchase from the core enterprise, and in this way, the purchase cost of distributors can be further reduced.
It is reported that IB gives a special trade financing line of RMB 10 billion to Hegang Group at present, of which the line for advance payment reaches RMB 9 billion. More than 100 downstream and upstream enterprises of the group have received the support of financing loans up to RMB 15 billion.
Stock-in-trade financing alleviating the gap of cash flow
Besides the advance payment financing, the supply chain finance of IB also provides stock-in-trade financing to enterprises with a view to shortening the gap of cash flow during their operation.
For this point, President Wan Yangbo of West Zhanqian Road Sub-branch of IB Nanchang Branch expressed his understanding:“We should turn an eye to the local advantageous resources in developing supply chain finance, and in areas with less core enterprises, banks may also choose the stock-in-trade financing business where they can control the trading elements via property in goods.”
As the leading enterprise in the industry of non-ferrous metal in Jiangxi Province, Jiangxi Copper Corporation is the largest and most modernized copper production and processing base in China, and an important production base of precious metal (like gold and silver) and sulfur chemical.
Since 2009, IB has made detailed survey over the settlement method and trading situation of Jiangxi Copper Corporation as well as its upstream and downstream enterprises. President Wan and his business team made careful analysis over the movement of forward and spot prices of copper then, and paid a close attention to the business activities of upstream and downstream enterprises of Jiangxi Copper Corporation.
“In 2009, we judged that the price of copper would rise. Against such a background, the upstream and downstream enterprises of Jiangxi Copper Corporation were motivated to enlarge their production scale. Nonetheless, these enterprises could hardly carry out cooperation with Jiangxi Copper Corporation with their own capital strength. Moreover, most of them had big stock-in-trade, which occupied a considerable amount of funds and was not helpful for the extension of scale. After carrying out investigation and analysis over their business environment and trading links, our bank provided the moveable assets pledged financing service solution to these enterprises.” Wan said, “Our bank chosen the distinctive industries like non-ferrous metal in the region of Nanchang to develop the stock-in-trade financing business, with the pledged financing varieties covering cooper, silver, lead, and aluminum.”
The so-called moveable assets pledged financing means that an enterprise pledges such moveable assets as stock-in-stock and warehouse warrant to the bank, who then controls the property in goods via supervising enterprise and grants the financing to the borrower, and the supervising enterprise make such operations as warehousing in, supervising, releasing supervision, and warehousing out the pledge according to the instructions of IB.The bank usually analyzes the property of pledge, market disposal channel, and relevant trading elements and requires the core enterprise to assume the responsibilities of shipment, repo and sales swap so as to ensure the smooth progress of supply chain trading and financing.
“The key for a bank to develop the trade financing business is to control trading elements on a supply chain, and the trading elements to be controlled mainly include logistics, information flow and capital flow. With moveable assets pledged financing, IB provides credit support for many upstream enterprises of the core enterprise – Jiangxi Copper Corporation”, said Wang.
At present, the supply chain stock-in-trade financing products of IB include moveable assets pledged financing (total control model), moveable assets pledged financing (case by case control model), standard warehouse warrant pledge, and non-standard warehouse warrant pledge, etc.
According to the actual demands of customers and different trading links, IB also provides enterprises with integrated supply chain finance services including the “advance payment + stock-in-trade” chained financing products such as import goods control issuance and manufacturer-distributor-bank financing.