Management & Engineering Garment Enterprises Based on SCF

Management & Engineering 07 (2012) 1838-5745
Contents lists available at SEI
Management & Engineering
Journal Homepage: www.seiofbluemountain.com
Financing Models Study of Small and Medium-sized Textile and
Garment Enterprises Based on SCF
Yi WANG 1,, Yuan CHEN 2
1. School of Management, Wuhan Textile University, Wuhan 430073, P.R.China
2. School of Mathematics and Computer, Wuhan Textile University, Wuhan 430073, P.R.China
KEYWORDS
Supply chain finance,
Financing mode,
Optimization
ABSTRACT
At present, the small and medium-sized textile and garment enterprises in our country are
facing the more and more difficult financing dilemma. Supply chain finance (SCF) is an
important way to solve the financing problem of such enterprises. In this paper, we consider
the supply chain operation of the textile and garment industry to design four supply chain
financing optimization schemes, meanwhile, we also analyze the concrete supply chain
financial practice of Li Ning Company.
© ST. PLUM-BLOSSOM PRESS PTY LTD
1 Introduction
Since the financial crisis in 2008, a large number of small and medium-sized textile and garment enterprises, taking up 90% of the
total textile industry enterprises have experienced the rupture of cash chain which caused the bankruptcy of many enterprises. The
financing problem is a crucial bottleneck constraining the development of the small and medium-sized textile and garment
enterprises. Therefore, it is important to solve the financing problem for such enterprises.
Supply chain finance (SCF) is an efficient way to settle the financing difficulties of the small and medium-sized textile enterprises.
SCF is a financial service that financial institutions provide to a single enterprise or upstream and downstream enterprises in a
supply-chain to promote the supply-chain benign development through financial capital and industrial economic cooperation.
Fundamentally, SCF is a systematic financial solution which commercial banks utilize at overall situation in order to coordinate cash
flow and reduce the whole supply chain cost. The financing mode breaking traditional limitation, which suits industrial economy and
provides financial services, not only extends the bank deep services, but also avoids the long standing financing issue of the small
and medium-sized textile enterprises.
2 Small and Medium-sized Textile and Garment Enterprises Financing Status
2.1 Traditional financing mode
The main traditional financing models of small and medium-sized textile and garment enterprises are the endogenous financing and

Corresponding author.
E-mail address: [email protected]
English edition copyright © ST. PLUM-BLOSSOM PRESS PTY LTD
DOI: 10.5503/J. ME.2012.07.013
110
exogenous financing. Generally, the endogenous financing capabilities of small and medium-sized textile and garment enterprises are
relatively weak, because that the endogenous financing ratio of the small and medium textile enterprises is relatively low since such a
low profit can not able to renew and modernize fixed assets and cope with the price rise of raw material and many other production
factors.
The exogenous financing mainly includes direct and indirect financing, which are represented by the characters such as the low direct
financing ratio and the high dependence of indirect financing on bank loan and so on.
2.1.1 The low direct financing ratio
The important source of direct financing is issuing stocks and bonds in capital market. Since the severe restrictions in bond market
that there are limitations of dimension control, centralized management and graded approval, issuing corporate bonds are so strictly
limited that it even needs mortgage and guarantee sometimes. Because the small and medium textile enterprises rarely meet the
issuing bond requirements, even utilizing the bond financing, a large number of enterprises select issuing bonds in order to satisfy the
capital demand in limited areas of private capital market. However, such bond interest is often above the bank loan interest, which
will obviously raise the financing cost of those enterprises. The newly cost is beyond the reach of the enterprises. From the above, the
small and medium textile enterprises rarely chose the bonds financing mode as a result of the consideration of their interest payment
capacity, payment limitation and so on.
Furthermore, there are strict requirements on listing and financing enterprises that asset scale limited small and medium enterprises
are unqualified to equity financing in stock market. Such enterprise can just launch the shares to promoters, relevant departments,
employees with limits which restricts the shares financing scope of small and medium textile enterprises in some degree.
2.1.2 High dependence of indirect financing on bank loan
Indirect financing includes bank loan, bill discount, finance lease and so on. Nowadays commercial credit and bill market need to be
developed in China, little small and medium textile enterprises finance through bill discount and finance lease. Bank loan has become
the leading financing mode. The main four commercial banks loan is 69.05% in small and medium enterprises’ indirect financing
which takes up the most important position, nevertheless, the other bank loan ration is very low, for example, commercial bank is
4.76% and credit cooperative is 5.56% respectively. Therefore, the indirect financing of small and medium textile enterprises is
highly dependent on bank loan. The traditional financing mode of the small and medium textile enterprises is shown in figure 2-1.
2.2 Dilemma the traditional financing mode is facing
2.2.1 High threshold of capital market limits the enterprises’ financing qualification
There are three markets including main board market, the second board market and the third market in our capital market. The main
board market provides listing services for mature large and medium-sized enterprises. The second board market also called growth
enterprise market or small and medium-sized market which mainly provides services for medium-small high technology enterprises.
The third board market called over-the-counter market contains agency share transfer system and local property right trading market.
There are strict limitations of listed companies in main board market. Except for the enterprise of circulation less than 50 million
stocks in small and medium board market, the other listing qualification and running regulations of small and medium board market
are the same as main board market. Compared with stock market, in our country, bond market develops relatively low whose amount
of financing is far from stock market. Meanwhile, the bond issuing restriction is so strict in bond market that most of small and
medium textile enterprises face the dilemma of unqualified to large market and no small market to issue.
Lining＆accessory
supplier
hard
little
Bank loan
Logistics
Garment produce
enterprise
privilege
more
Garment
distributor
hard
Bank loan
Client
little
Bank loan
Information flow
Capital flow
Figure 2-1 The traditional financing mode figure of the small and medium textile enterprises
2.2.2 Imperfect credit system which obstructs the stable cooperation between banks and enterprises
In an investigation on provinces of more developed enterprises and more credit guarantee agencies, about 23.8% of the small and
medium enterprises are refused to loan because they could not implement the guarantee and about 32% because of the mortgage. The
reason for the problem is mainly due to low credit rating in most small and medium textile enterprises with no credit file, inadequate
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variable cash for mortgage and very limited credit resources which make the banks have no confidence in enterprises’ debt paying
capacity leading to the short-term and instable financing relationship between small and medium textile enterprises and banks.
2.2.3 Financing credit leading to difficult indirect financing between enterprises
Being lack of liquidity and development funds, the small and medium textile enterprises have difficulty in producing and investing
that they can not get the external credit capital from changing the credit through promoting profit. There are financial statements not
reflecting the real operation status, even unfair information, supply contracts, property certifications in applying bank loan to obtain
loan, which deeply impair the confide of bank to the small and medium textile enterprises. Hence, some enterprises have entrapped
into a vicious circulation of inadequate capital to bad management efficiency to weak financing credit.
3 Optimizing the Financing Mode of Small and Medium Textile Enterprises
Based on SCF
Actually, the financing difficulty of these enterprises is a credit difficulty that cannot be solved just relying on their own strength
accumulation. Therefore, the enterprises should change the financing mode of enterprise as a unit to a new financing mode called
supply chain finance constructed on supply chain where joint project or value chain is a unit.
There are mainly two types containing four modes in the SCF. The first type is a financing with core enterprises on the supply chain
as its centre including accounts receivable financing and bonded warehouse financing. The second one is the financing with third
party logistics service providers outside the supply chain including the financing warehouse financing and entrusted loan.
3.1 Accounts receivable financing mode (as shown in figure 3-1)
Step 1: Small and medium textile enterprises apply short term bank loan which can not exceed the account receivable aging with the
account receivable documents and invoice of the core enterprises on the supply chain as mortgage.
Step 2: Small and medium textile enterprises supply production to core enterprises
Step 3: Core enterprises pay for the funds on account to the upper small and medium textile enterprises in order to help them refund
the loan.
3.2 Bonded warehouse financing mode (as shown in figure 3-1)
Step4: With the condition that core enterprises promise buy-back to banks, the small and medium textile enterprises apply for bank
loan with seller’s warehouse receipts in the warehouse approved by the banks as mortgage
Step5: Pay for the loan.
Step6: The core enterprises repurchase the loan if small and medium textile enterprises cannot able to repay the loan.
3.3 Financing warehouse financing mode (as shown in figure 3-2)
Step 1: Small and medium textile enterprises deposit the raw material or production as mortgage in financing warehouse of the third
party logistics enterprises.
Step 2: The third party logistics enterprises take charge of checking mortgage and accessing value and provide relative credit
guarantee to banks.
Step 3: Small and medium textile enterprises apply for the bank loan.
Step 4: The small and medium textile enterprises pay on installments during the consecutive management procedure or pledge
products marketing process.
3.4 Entrusted loan financing mode (as shown in figure 3-3)
Step 1: The banks grant certain credit to logistics enterprises according to the scale and management capacity.
Step 2: The small and medium textile enterprises directly apply for loan to the third party logistics enterprises that are responsible for
the loan operation and risk management.
Step 3: Pay for the loan.
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Lining ＆ accessory
Garment produce
enterprise
2
supplier
Garment
3
distributor
6
Client
4
1
5
Bank
Information flow
Logistic
Capital flow
s
Figure 3-1 Accounts receivable financing mode and bonded warehouse financing mode
Third party
logistics
1
2
3
Textile and garment
Bank
enterprises
4
Figure 3-2 Financing warehouse financing mode
2
textile and garment
enterprises
Third party
3
1
logistics
Bank
Figure 3-3 Entrusted loan financing mode
4 Case Analysis
Li Ning Company and Standard Chartered Bank had agreement on supply chain financing packages and put the project into effect in
the latter half of 2009. With the help of Standard Chartered Bank, Li Ning Company have tried to accomplish the goal by providing
extra services to its suppliers and dealers which led to more regular fund flow, more advanced financial index and superior
achievement among its partners. Li Ning Company and upstream and downstream enterprises have successfully created a mutually
beneficial situation. Meanwhile, relying on Li Ning Company’s powerful screening and ranking on its own supply chain, Standard
Chartered Bank have cultivated many growing excellent small and medium enterprises which help the bank change the traditional
situation depending on major clients to improve the intermediate business income. Evidently, SCF is definitely the best way to
achieve win-win to Li Ning Company, upstream and downstream enterprises and Standard Chartered Bank.
Standard Chartered Bank has successfully implemented the supply chain financing project for many large enterprises since 2005.
There are mainly 2 financing modes the bank provided to Li Ning Company including: vendor financing and dealer financing.
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Vendor financing project: The bank provides the vendor financing business to Li Ni Company that the chief financial officer of the
company can help the suppliers obtain the more favorable financing channels. Of course, Li Ning Company could apply for the more
favorable purchase price and longer loan term. The bank has extended the financing after shipment to before shipment during the
procedures above. The bank provides financing to suppliers to support raw material purchase and production activity according to the
Li Ning Company’s orders. Once the suppliers ship the production, the financing interest rate will be cut as soon as the credit risk is
reducing.
Dealer financing project: Standard Chartered Bank mainly considers that Li Ning Company faces the pressure of extending loan term
from dealers or clients. In traditional mode, the bank mainly depends on analyzing financial statements to ascertain the clients’
financial status in credit assessment that the bank can demand guarantee or mortgage if it doesn’t satisfy the financial statements.
However, in the dealer financing mode, the bank considers that whether the production is well-seller which is usually reflected in
market share. Since the bank doesn’t emphasize the cargo control and ownership license which leads to simple and efficient
transaction procedure, Li Ning Company in the central position not only prolongs the dealers’ loan term, but also does not undertake
all the risk.
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