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Oiling the wheels of the supply chain

What to look out for

  • Red In the past, supply chain finance schemes were paper-based and labour-intensive. Today, digital options are common
  • Amber Supply chain finance gives both buyers and sellers more liquidity and keeps capital moving and working
  • Green Supply chain finance companies offer a win-win compromise where buyers get longer terms and sellers can get paid sooner

Discover more about how supply chain finance works, how it differs from other forms of business funding and how it could speed up your transactions.

Why would you use supply chain finance?

Coming up with a definition for supply chain finance can be a little complicated. There are many options for financing payments between buyer and seller. Most commonly, supply chain finance initiatives look to reduce barriers between buyers and sellers by integrating the supply chain and finance components.

Buyers normally want the longest payment terms possible. Sellers want their invoices paid as quickly as possible. Supply chain finance companies offer a win-win compromise where buyers get longer terms and sellers can get paid sooner. This gives both buyers and sellers more liquidity and keeps capital moving and working. This can be particularly helpful for newer or smaller businesses, which cannot comfortably tie up capital in receivables.

Supply chain finance is a type of trade finance. However, the difference between trade finance and supply chain finance is that trade finance is more often concerned with providing buyers and sellers with options to facilitate more secure payments between companies that may not have an established relationship and want assurances. It is less concerned with speeding up payments or providing longer payment terms.

How does supply chain finance work?

When people talk about supply chain finance today, they are likely to be talking about a process called ‘reverse factoring.’

Reverse factoring is a financing solution initiated by the buyer in order to help its suppliers finance receivables from that buyer more easily and at a lower interest rate than would normally be offered. A very large buyer may finance the whole process on its own, demanding longer payment terms but offering suppliers the option to receive payment earlier in exchange for a small discount on the amount payable. Sellers will often agree, as a small discount to receive payment weeks or even months earlier is often worth the cost.

While it is possible for buyers and sellers to arrange this type of finance themselves, there is often a supply chain finance provider, either a specialist lender or bank, involved in the process. In the past, many supply chain finance schemes were paper-based and labour-intensive. Today, digital supply chain finance options are common.

Whether run by third-party supply chain finance platform providers or by a large buyer themselves, a digital supply chain finance solution offers speed, transparency and security. In such systems, a seller issues an invoice to a buyer. The buyer approves the invoice and uploads it to the platform. The seller can then track their outstanding invoices and wait to collect payment on the due date. If they do so, they receive the full amount.

However, the seller can choose to redeem any of the approved invoices before maturity and receive the funds, minus a fee, immediately. This can all be done with confidence, as blockchain for supply chain finance can provide the security and verifiability businesses need to trade at a distance, especially across borders. Global supply chain finance allows both buyers and sellers to move with the speed and agility previously only available to huge players.

What is the difference between reverse factoring versus supply chain management?

Simple. Reverse factoring is one type of supply chain finance, but not the only one.

Factoring is a type of invoice finance. The factor pays the business a portion of its accounts receivable invoices immediately and then proceeds to collect the invoice when it is due. It then remits the outstanding portion of the invoice to the business, minus its fee for service.

The difference with supply chain finance is that the supplier receives the full amount of its invoice, minus a fee, immediately and the supply chain finance provider now owns the debt.

Another type of supply chain finance is supplier financing. In this case, buyers arrange finance with supply chain finance providers. When the buyer needs to purchase supplies, such as raw materials or parts, it places an order with the supply chain finance provider, who places the order with the supplier and pays for it. The finance company then invoices the buyer on standard credit terms, such as 30-day or 60-day payment, with a fee added for the service.

What are the costs of supply chain finance?

The cost of supply chain finance varies depending upon the terms a buyer and seller agree or the terms set out by the third-party providing the finance. However, the discount the seller is charged is usually less than the interest costs of other types of borrowing, such as cash flow finance or working capital finance.

If the terms of the finance and the platform allow, the discount on the invoice may vary depending on how long the seller waits before redeeming the invoice. The longer the seller waits before cashing the invoice, the smaller the discount. It is crucial to review all terms of supply chain finance before undertaking an agreement.

How long does it take to secure supply chain finance?

For a seller, joining a supply chain finance platform can take almost no time, requiring only an invitation from a buyer. It is important to note that supply chain finance is initiated by buyers. If the buyer is not self-financing the scheme, it is the buyer’s credit history and business details that will be used to determine the terms of finance offered by provider. To provide sustainable supply chain finance, providers need to cover the risk they take on. If a seller redeems an invoice and receives payment and the buyer then defaults on paying, it is the finance provider that bears the loss.

What type of security do I need for supply chain finance?

A supply chain finance arrangement does not require any security from the seller. If there is a finance supply chain platform provider or financial institution in the mix, they pay the seller and take ownership of the debt, collecting from the buyer later. The invoice is, essentially, a loan the provider or financial institution gives the buyer until the invoice is paid. How much finance the provider or institution will provide the buyer and whether it will require security, depend on the creditworthiness of the buyer.

Useful links:

Working capital finance: Keep your business agile and ready to grow

Invoice finance: Improve your cash flow

Trade finance: Your guide to protecting your imports and exports

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