What is supply chain finance?
Supply chain finance is the collective term for a group of financial solutions aimed at optimising cash flow and working capital for all parties involved in a supply chain. It encompasses various products and techniques designed to enhance the efficiency and effectiveness of financial transactions between buyers, suppliers, and financial institutions. While some organisations choose to restrict their definition to cover purely payables finance (otherwise known as supplier finance or reverse factoring), the Global Supply Chain Finance Forum – made up of bodies including the ICC, ITFA & FCI – consider the full suite of open account trade products as sitting underneath the supply chain finance “umbrella”.
Supply chain finance consists of two primary components: receivables finance and payables finance.
Receivables finance, also known as invoice financing or accounts receivable finance, is a supply chain finance solution that enables businesses to unlock the value of their outstanding invoices. It allows companies to receive early payment for their invoices, typically at a discounted rate, instead of waiting for customers to settle their invoices according to the agreed payment terms.
By utilising a receivables finance solution, businesses can access immediate working capital, reduce cash flow gaps, and mitigate the risks associated with delayed payments. This financial tool provides flexibility and liquidity, enabling businesses to invest in growth, meet their financial obligations, and maintain stable operations.
Payables finance, often referred to as supplier finance or reverse factoring, is a supply chain finance solution that focuses on the financing needs of suppliers. It allows suppliers to receive early payment for their outstanding invoices from a financial institution, based on the creditworthiness of the buyer.
With payables finance, suppliers can improve their cash flow by receiving payment earlier than the agreed payment terms. This provides them with greater financial stability, reduces reliance on costly short-term financing options, and helps foster stronger relationships with buyers. Buyers, on the other hand, benefit from extended payment terms, enabling them to optimise their working capital and preserve cash flow.
How does supply chain finance work?
Supply chain finance involves the coordination of various financial solutions within the supply chain. Here’s a simplified overview of how it works:
Receivables Finance: Businesses can sell their outstanding invoices to a financial institution or receive early payment against those invoices. The financial institution pays the business a percentage of the invoice value (minus a fee) upfront and collects the full amount from the customers when the payment is due.
Payables Finance: Suppliers can request early payment for their invoices from a financial institution. The financial institution, after verifying the transaction and assessing the buyer’s creditworthiness, provides early payment to the supplier at a discounted rate (minus a fee). The buyer then settles the invoice with the financial institution at a later agreed-upon date.
What are the benefits of supply chain finance?
Supply chain finance offers several benefits for all parties involved:
Improved liquidity: Both buyers and suppliers can optimize their cash flow by accessing early payment or extending payment terms, respectively.
Reduced financial risks: Supply chain finance solutions mitigate the risk of non-payment and potential disruptions in the supply chain by involving financial institutions.
Enhanced supplier relationships: Early payment options and improved cash flow contribute to stronger relationships with suppliers, leading to better terms, discounts, and increased supplier loyalty.
Efficiency gains: Automated supply chain finance platforms streamline the entire process, reducing administrative burdens, paperwork, and transaction costs.
Is supply chain finance only for large companies?
No, supply chain finance is not limited to large companies. While it has traditionally been more prevalent among large corporations, supply chain finance solutions are increasingly accessible to small and medium-sized enterprises (SMEs) as well. Technology platforms and financial institutions are developing tailored offerings to cater to the specific needs and scale of SMEs, enabling them to benefit from improved cash flow and working capital management.
How does supply chain finance differ from traditional financing options?
Supply chain finance differs from traditional financing options, such as loans or lines of credit, in several ways:
Supply chain finance involves multiple parties working together (buyer, supplier, and financial institution) to optimise the financial flow within a supply chain, whereas traditional financing is typically a bilateral relationship between a borrower and a lender.
Supply chain finance helps mitigate financial risks by involving a financial institution that assesses the creditworthiness of the buyer and facilitates early payment to the supplier. Traditional financing places more risk solely on the borrowing party.
Supply chain finance focuses on financing specific transactions within the supply chain, such as individual invoices, whereas traditional financing often provides ongoing access to funds for general business purposes.
Interest rate dynamics
Supply chain finance may offer suppliers the opportunity to access early payment at a discounted rate, whereas traditional financing options generally involve interest charges or fees based on the loan amount and repayment terms.