1. Chapter I: Introduction
1.2. Definitions
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This is where Supply Chain Finance comes into play. Every time small sellers need to sell their products, they could do it through a digital platform where they can sell their invoices at a discount in exchange for receiving early payment. So for example, if they initially were subject to 45 days of credit with a company that they usually make business with, they could now choose to reduce it to a number of days that suit their capital needs. The finance platform now has to hold the credit with the buyer, and if required have the possibility of even extend it further, since now the buyer does not have to rely on the small supplier capability of handling longer credit. This is another arbitrage opportunity for the company.
Finally, to make the business model sustainable the capital has to come from a source that requires a lower return compared with the usual sources of short term financing such as banks.
This can be achieved with rounds of venture capital, exclusively with investors who are interested in the social initiative aspect of the company. This company will help small businesses to grow and in the big picture, develop economically countries that require a disruption of old models plagued by corruption and limited opportunities.
1.2. Definitions
Accounts Receivable: current asset in the balance sheet that represents outstanding collection of cash due to a company by customers that received products or services.
Accounts Payable: current liability that relates to payments due to suppliers by having received
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1. Transaction occurrence
2. Transaction verification by the block chain itself 3. Transaction Storage on the block chain
4. Hash identifying code assignment
These four steps ensure that all transactions are valid and that the transparency of all the information can be ensured in real time. For supply chain applications allows full transparency, reduces fraud possibilities and ensures accurate record keeping for all parties.
The way every block is added sequentially and using has numbers created by complicated math models makes forgery or fraud extremely difficult and improbable. When a hacker wants to alter a block inside the block chain, they will need to enter and make the modification in every computer that has stored the block chain. Additionally, when making changes to the information, a new hash code will generate and thus make impossible the forgery. If any of the computers detect an altered block, it will immediately reject it as part of the block chain and deny access to the network. Figure 1 illustrates how information is transferred across in order to eliminate the possibility of fake blocks being added to the chain.
Figure 1: Typical Block Chain Transaction Flow Diagram
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The other term that needs to be understood in terms of network security is the consensus protocol, in which all the computers in the network have to agree in order to add new blocks of information. This concept is illustrated further by figure 2. In terms of public and private information, the identity of block chain users can be protected by having public and private keys. The public key will allow the participant to engage in transactions with the rest of the block chain, and the private key will allow users to protect their individual or sensitive information. This information may be identity related or finance related.
For the banking industry, block chain can mean reducing settlement time from 3 days for international transfers to 10 minutes, or the time it takes to create a new block. Smart contracts can also be enforced using block chain. For example, in a supply chain a smart contract can be enforced when the goods are received by the buyer to release early payment when the goods have been verified. Additionally, in a supply chain, the origin of goods can
Figure 2: Consensus reached in a block chain network Typical Applications of Block Chain
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Buyer: entity that buys a product from a supplier in a supply chain. It can buy products by paying cash or negotiating credit terms.
Crowdfunding: the use of small amounts of capitals from individuals that normally are not part of financial markets, venture capitalists or other traditional funding sources. In recent times crowdfunding has been made possible by platforms created for the purpose, social media and other internet based tools. Typically, crowdfunding is directed to personal projects, entrepreneur activities, prototype development, development of socially oriented products and services among others. Normally crowdfunding sites create revenue by keeping a percentage of the funds.
Discounted receivables: collecting payment for accounts receivables minus a percentage agreed by the interested parties. Follows the following formula:
𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑑𝑑𝑑𝑑 = 𝑟𝑟𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑑𝑑 𝑋𝑋 (1 − 𝐴𝐴𝐴𝐴𝑟𝑟𝑑𝑑𝑑𝑑𝑑𝑑 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 %) Dynamic Discounting: A solution that gives buyers more flexibility to choose how and when to pay their suppliers in exchange for a lower price or discount for the goods and services purchased. The “dynamic” component refers to the option to provide discounts based on the dates of payment to suppliers. In most cases, the earlier the payment is made, the greater the discount. The funder for dynamic discount programs is typically the buyer.
Dynamic discounting is typically applied on an invoice-by-invoice basis. Unlike supply chain finance, buyers typically use their own balance sheet or excess cash to “fund” the program and generate additional purchasing discounts.1 Typical rates for dynamic discounting average at 18% APR.
Factoring: same definition as receivables purchase. It involves recourse, which means
1 Prime Revenue paper: Dynamic Discounting Vs Supply Chain Finance
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uncollected bills result in a discount from purchased accounts receivable.
Forfaiting: Selling of medium or long term receivables by an exporter to a funder at a discount with no recourse. Eliminates completely the risk of default by paying a discount.
Only available at transactions above $100,000. Not many currencies available and the cost tends to be high.
Funder: entity who is willing to supply funds for supply chain transactions and assume the risk of default until the buying party transfers the funds back after a negotiated credit period.
Money Laundering: crime in which funds from illicit activities are introduced to the regulated financial system. Usually involves creating shell companies to give fund transferring an appearance of legality.
Premium for payables: agreeing to pay a premium for the benefit of paying a credit until a further date. Follows the following formula: 𝑁𝑁𝑑𝑑𝑑𝑑 𝐴𝐴𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑟𝑟𝑝𝑝𝑟𝑟𝑟𝑟𝑟𝑟𝑑𝑑 = 𝑟𝑟𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑟𝑟𝑝𝑝𝑟𝑟𝑟𝑟𝑟𝑟𝑑𝑑 𝑋𝑋 (1 + 𝑃𝑃𝑟𝑟𝑑𝑑𝑃𝑃𝑑𝑑𝑑𝑑𝑃𝑃 𝑓𝑓𝑑𝑑𝑟𝑟 𝑝𝑝𝑟𝑟𝑝𝑝𝑟𝑟𝑟𝑟𝑟𝑟𝑑𝑑𝑑𝑑 %)
Reverse Factoring Solution (RFS): designated name for the business model developed in this Business Model.
Securitization: design of a marketable financial instrument to secure capital. It has to be backed by underlying assets that may increase or decrease their value over time. In the case of a loan, securitization allows the original lender to remove the loan from the liabilities section of the balance sheet.
SME: Small and medium enterprises. Depending on the country the definition varies depending on the capital of the company, yearly income or number of employees. Typically,
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financial transactions to ensure that the regulations regarding financial services are followed by the corresponding financial institutions. They exist in order to protect customers against excessive charges, excessive interest rates and services that may be harmful for individual investors.
Supplier: entity that sells a product to a buyer in a supply chain. It can sell its products through direct cash transfer or credit terms.
Supply Chain: sequence of processes involved in the production and distribution of a commodity. Involves suppliers, manufacturing centers, warehouses, distribution centers, retail outlets, banks, third party logistics providers, etc. Depending of the complexity of supply chains, different parties can become at different points of the chain to ensure timely delivery of produced goods until they reach the final customer.
Supply Chain Finance: finance solution that aims to reduce supply chain risk by providing suppliers of products, who are subject to extended payment terms by buyers, the chance of receiving early payments at low cost. Provides liquidity to suppliers, and the chance of extending credit time for buyers. It can be self-funded or provided by a third party. Typical rates can be around 2-3% average APR.
Transaction Settling: time it takes to record and process a transaction when multiple parties or currencies are involved. Usually the transaction settling takes place due to the fact that exchange rates have to be recorded at a specific market close time, and funds can be transferred internationally at specific schedules. When more banks or financial instutions are involved due to having a low liquidity currency, the transaction settling may take a longer time.
Receivables Purchase: process in which a company that has collected accounts receivable over time finds a third party who is willing to purchase them in order to make a profit. The
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funder is typically a collection agency or a bank. The seller receives security, and the buyer can profit if the collection costs plus receivables purchase cost are lower than collections.
The buyer has the right of recourse, which means the buyer can discount uncollected accounts.
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