Supply chain finance
Supply chain finance
Supply chain finance is a source of short-term credit that optimises working capital for both buyer and seller.
The process
Instead of relying on the creditworthiness of the supplier, the lender deals with the buyer. Suppliers effectively sell their invoices or sales receivables or debtors, at a discount, to banks or other financial providers, often called factors. Although they do not receive the full amount, suppliers get faster access to the money they are owed. That can then be used for working capital.
In effect the buyers get more time to pay. Instead of relying on the creditworthiness of the supplier, the bank or finance provider is relying on the creditworthiness of the buyer.
Supply chain finance generally uses a technology platform in order to automate transactions and track the invoice approval and settlement process from the initial raising of an invoice through to completion, when the invoice is paid.
Key points
- Supply chain finance is a technology-based business and financing process, which links the three parties to a transaction – buyer, seller and finance provider.
- Supply chain finance works especially well when the buyer has a better credit rating than the seller and can thus access capital at a lower cost.
- It reduces risk for the finance provider and works especially well when the buyer’s credit rating is better than that of the seller.
- Whilst the price paid for suppliers’ invoices will often be at a discount, supply chain finance does provide access to capital at a lower cost.
- Supply chain finance provides short-term credit that optimises working capital for both the buyer and the seller.
Supply chain finance variations?
There are several variations to supply chain finance transactions – they are still funded by the finance provider or bank and still ultimately rely on the buyer’s credit rating:
- extension of buyer’s accounts payable terms
- inventory finance
- payables discounting
Why supply chain finance could benefit your business
The buyer can use the fact that their better credit rating is being used to support the use of supply chain finance, to negotiate better terms from the seller. This may be an extension of payment terms, which may release cash to be used by the buyer for other purposes. The seller benefits from access to cheaper capital, and/or the option to sell its receivables for immediate payment.
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