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Supply-chain financing

During the process it takes to produce a product to the delivery of said product, there are very high chances that working  capital is tied up in the supply-chain.

Supply chain financial (also known as reverse factoring) is a form of financial transaction that provides suppliers the opportunity to access financial services by receiving early payment of their invoice. It is a type of payment solution that optimizes cash flow by allowing businesses extend the terms of their payment to their supplier and providing these supplier the option of early payment from a third party. This helps to free up working capital in the supply chain.
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Why Supply-chain: What purpose does it serve?

The aim of the supply chain is to optimise cash flow at an inter-organisation level through the solutions implemented by the financial institutions or technology providers.

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How does Supply chain financing work?

Much like traditional factoring, supply chain financing is similar in the sense that it involves three parties:

• The business/consumer/buyer

• The supplier

• The financier (the third party factor)

Supply chain financing starts with the consumer making a purchase order from the supplier. The supplier and the buyer then agree on the terms of payment (i.e 30, 60 or 90days).

When the supplier fulfils a purchase order, an invoice is issued to the consumer and then the products are shipped.

To close the sales to revenue gap created by the payment terms, supply chain is initiated. This is done by the buyer (usually a large company).

Supply chain financing

The buyer initiates this by setting up the system (issued by the technology  provider or financial institution). After, the buyer brings the seller on board.

The supplier then uses the system to upload the invoice for the buyer to verify. Once the buyer approves the invoice list, the supplier can decide which of the invoice he wants the financier to pay early.

The buyer brings the selected invoice to the attention of the financier so that the invoice can be paid.

The supplier receives the payment from the financier before the agreed date of payment between them and the buyer (payment terms). 

The  buyer  then pays the financier instead of the supplier according to the buyer's payment terms.

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Benefits of supply-chain financing

Supply chain financing is a system that benefits all the parties involved;

• The Supplier

The supplier has fast access to cash which gives him an advantage. They have control over their cash flow and more choices on how they are paid. They do not have to use their  working capital in the financing process because the process is initiated by the buyer. They also have access to low interest rates than they otherwise would if they contacted the financial institution themselves.

• The Buyer

The buyer can extend payment terms if necessary. Since both parties are involved during the process, trust is built. This ensures a long-lasting relationship between buyer and seller. It also gives the buyer leverage during negotiations.

• The Financier/Financial Institution

Since a long lasting relationship is developed between buyer-seller, the financier has higher chances of working with a long lasting business. Also, the financier can do business with all the suppliers of the consumer business without needing to directly pursue them.

Disadvantage of supply chain financing

The major disadvantage is that supply chain financing requires a fee before it can be accessed usually charged by the financier. Although compared to the stress and the restrictions on cash flow that the payment terms will create without the inflow from a supply chain financing company, it might not be so great a disadvantage.

Supply chain financing vs financing

In traditional invoice factoring, the supplier initiates the process. They contact the financial company to sell their invoice at a discounted rate and the financial institutions assumes ownership of the debt but in the case of supply chain financing, the buyer initiates the process. They takes out a loan to pay their supplier earlier than the set time of payment agreed upon in the payment terms. This is usually done in return for a discount. And the buyer now pays back what they owe to the financial company, profiting in the process.