Understanding Supply Chain Finance

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Supply Chain Finance (SCF) is a financial solution that optimizes working capital and minimizes risk in global trade. It’s a win-win for all parties involved, including buyers, sellers, and financial institutions. Here’s a comprehensive guide to understanding and implementing SCF in your business operations.

What is Supply Chain Finance?

Supply Chain Finance is a type of supplier finance that allows a supplier to cash in their receivables (invoices) earlier than the due date, thus freeing up working capital. It benefits both the buyer and supplier by accelerating cash flow and optimizing working capital. While buyers get more time to pay off their balances, suppliers gain quicker access to the money they are owed. The extra cash on hand can then be used to fund other projects and keep the business running smoothly.

Unlike other receivables finance strategies, like invoice factoring, supply chain finance is established by the buyer (instead of the supplier). Another main difference is that suppliers can access SCF at a cost based on the buyer’s credit rating (rather than their own). As a result, suppliers are usually able to receive supply chain finance at a lower cost than other financial services.

How Does Supply Chain Finance Work?

Supply chain finance works through a mutual collaboration between buyers and sellers, which counters the competitive dynamic that typically defines the relationship. Traditionally, buyers will attempt to delay payment, while sellers always want to speed it up.

SCF works best when the buyer has a better credit rating than the seller, and can source capital from a bank or other financing options at a lower cost. This allows buyers to negotiate better terms from the seller, like extended payment schedules. Meanwhile, the seller is able to unload the product faster, while receiving immediate payment from the third-party financing body.

Once a buyer has entered into an agreement with a supply chain finance provider, they will then invite suppliers to the program. While some supply chain finance programs are funded by a single bank or other finance provider, other programs are supported on a multi-funder basis through a dedicated platform.

Benefits of Supply Chain Finance

Supply Chain Finance offers numerous benefits to both buyers and suppliers:

For Buyers

  • Improves Supply Chain Health: By offering suppliers easy SCF, buyers can reduce the likelihood of future disruption that could affect their own operations.
  • Optimize Working Capital: Buyers will improve their working capital position with SCF strategies.
  • Greater Negotiating Power: Buyers can negotiate bigger discounts and better prices on larger orders.
  • Centralization of Payments: If most (or all) suppliers join an SCF program, payments can be routed to the financer, simplifying accounts payable.
  • Strengthens Supplier Relationships: Buyers can improve their relationship with suppliers by providing them with access to low-cost funding.

For Suppliers

  • Access Lower-Cost Funding: The cost of funding is lower for suppliers than it would be if they went through other funding sources.
  • Working Capital Improvements: By accessing supply chain finance, suppliers can receive payment on their invoices earlier than they typically do.
  • Greater Forecasting Accuracy: When suppliers access SCF, they’ll gain a greater level of certainty over the timing of incoming payments.

Conclusion

Supply chain finance benefits everyone involved, from the buyer to the bank and seller; it helps to strengthen business relationships and get suppliers paid quickly. It’s a buyer-led type of financing, often referred to as “reverse factoring” that boosts working capital, while supporting the long-term viability of suppliers. If you’re looking to transform your business for growth and open up to new revenue streams, supply chain finance could be an excellent option