A General Introduction and Overview of Supply Chain Finance

Introduction

In October 2017, the General Office of the State Council issued the Guiding Opinions on Actively Promoting Innovation and Application of Supply Chains, encouraging core enterprises to establish supply chain financial service platforms, develop online account receivable financing and other supply chain financial models, emphasizing SCF to serve the real economy. SCF relies on real estate industry and trading process to develop credit services for small and medium-sized enterprises (SMEs), which transforms asset mortgage control into trade operation monitoring. Since its naissance, SCF has become an important tool to promote the healthy development of China's real estate industry and eased the financing difficulties of the real economy.

According to the data from the National Bureau of Statistics, by the end of July 2018, the balance of account receivable of China's industrial enterprises was 13.9 trillion yuan, an increase of 11.5% compared to the same period in 2017. Meanwhile, the proportion of account receivable in current assets also increased to 25.2%. Correspondingly, in the first half of 2018, the increment of aggregate financing was 9.1 trillion yuan. Among them, RMB loans to the real economy accounted for 96.3% of the social financing scale in the same period, an increase of 22.5% year-on-year. According to another set of data, overdue payments continued to increase. The proportion of companies who experienced overdue payments over 120 days increased from 19% in 2016 to 26% in 2017, and those who experienced excessive long-term overdue payments (over 180 days) increased from 35% in 2016 to 47% in 2017. The large amount of account receivable that cannot be put into production operations have brought heavy pressure for the survival of SMEs.

In February 2018, China's first Social Financing Cost Index was released, showing that the average costs of China's social financing were 7.6% (not including various types of handling charge, etc.). While SMEs’ financing costs were generally higher than 10%. Judging from the situation in China, SMEs are generally lack of self-owned funds (Chen and Hu, 2011), moreover, their business volume is far lower than the threshold of the securities market in China. To satisfy the daily business turnover, SMEs have to turn to commercial bank loans and other traditional financial services for raising funds. Nevertheless, traditional financial services are reluctant to lend because SMEs are usually lack of assets, guarantees and mortgages. The inherent contradictions between the asset and the fund side make it difficult for the SMEs to obtain finance service through traditional financial channels.

SMEs in the industrial chain not only face large quantities of account receivable that cannot be put into production and operation, but also encounter long-term difficulties in financing. Traditional financial services regard companies and businesses as isolated entities, resulting in inefficient and expensive financial services. Chen and Hu (2011) consider SCF as an innovative financing solution. In contrast to traditional financial services, SCF concentrates on the transaction process, which effectively integrates the flows of logistics, information, business and capital, the financial services is under a trust-based, limited-constrained partnership.

Based on industrial features, SCF focuses on the core supply chain parties or core data holders, providing comprehensive finance service for the whole supply chain relevant enterprises depending on trading process. The biggest features of SCF include: self-liquidating, achieving the value transferring of asymmetric time requirements, credits, effective risk control and balanced bargaining power. The self-liquidating of SCF refers to the fees (interest) and risks generated by financial service can be covered by future revenues from supply chain trade. SMEs do not have perfect credit data and lack standard mortgages, but they have stable cash flow in stable supply chain trade. Thus, to an appreciable extent, SCF relies on the use of loan which is called supply chain circulation guarantee to ensure the risk of SCF is controllable.