4 Financial Solutions for the Food Supply Chain

July 4, 2023

There are countless financial challenges in the agri-food industry, necessitating the construction of an efficient supply chain despite financial and liquidity considerations.

RF provides the solution to this need. Continue reading to learn more.

After reading today’s blog, you can click the following link to learn how Silo’s financial platform can help you mitigate risks related to the food supply chain.

Supply Chain Risk Management

At such an incredible cost of disruption, preventing issues and quickly recovering from them is of the utmost importance in any supply chain environment. Companies should implement risk management strategies as an integral part of their operations strategy to help avoid disruptions or recover when problems arise.

Visibility into supplier financial stability and credit histories is also crucial - some credit-rating agencies provide predictive financial reports on thousands of potential suppliers, making it easy to identify reliable partners.

Supply chains have become increasingly complex and interdependent over the years, connecting parties from around the globe.

As such, supply chains are vulnerable to political instability and climate change as well as suppliers ceasing operations or failing to meet quality standards. One effective governance mechanism for mitigating such risks would be creating cross-functional teams where line managers also act as risk owners for their functions.

Supply Chain Collateral Management

Lenders need to know where their collateral is; otherwise, they become vulnerable to losing or having stock stolen or vanished from warehouses, fraud, food rotting in silos, default payments, and the associated cost. Collateral management is becoming an essential and growing risk mitigation technique used by financial institutions.

Banks turn to collateral managers for warehouse receipt financing through a Collateral Management Agreement (CMA). A CMA grants custody and control over commodity stocks until they are exported or until repayment has taken place from borrowers.

However, this approach poses its own set of unique challenges. For instance, warehouse managers in each country can only be paid $1,000 per month to oversee millions of dollars worth of fertilizer - leaving ample opportunity for collusion and fraud to occur. Therefore, some collateral managers employ managers in key locations or rotate staff to mitigate risks.

Technological innovations such as cameras or drones may also prove helpful; some companies even use drones in their warehouses to monitor client inventory financing agreements.

Supply Chain Finance

Supply chain finance solutions provide a financial bridge between buyer and supplier. These financing models focus on buyers' creditworthiness while employing data verification to support an efficient supply chain finance (SCF) process.

Tech-led SCF programs make onboarding hundreds of small suppliers with little paperwork easier than ever before. They are scalable and flexible while improving material cash flow for suppliers.

Supply chain finance (also referred to as reverse factoring or invoice financing) is an alternative financial arrangement that allows a buyer to enlist a financier to pay its outstanding invoices to suppliers at a discount prior to the payment due date and at an extended payment term. They then repay the financier back later.

It can be up to 10 times cheaper for suppliers compared with traditional financing instruments like AR factoring and lines of credit while simultaneously helping reduce cash volatility - especially helpful in an agri-food environment where primary producers may be particularly exposed.

Supply Chain Accounting

Food supply chains are complex systems of complex logistics systems, information-sharing policies and government laws that vary by business. Without proper communication between businesses in this supply chain, delivery delays may increase significantly and result in spoilage or contamination issues.

Regulations placed upon the agricultural industry are intended to safeguard workers and ensure safe food consumption; however, such restrictions can make hiring new labor and importing food products difficult, creating shortages and increasing consumer prices.

Distributed ledgers accessible to all participants of the food supply chain enable real-time monitoring of product activities and compliance.

Blockchain allows food provenance traceability by recording details about its journey from farmers, processors, transportation providers and end consumers.

Data is stored, timestamped, and encrypted to prevent tampering - making the data safe from being altered by third parties or any potential malicious users.

Distributors can use it to ensure transparent selection by tracking prequalification documents as well as performance indicators of their suppliers, providing transparent selection processes and procedures that ensure fair selection processes are achieved.

 

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