Today’s global trade is heavily reliant on supply chains, which now stretch across the world to connect multinational buyers with suppliers in a vast number of countries. As chains grow in both size and complexity, many businesses face challenges in meeting the financing costs required to maintain daily operations – from purchasing equipment and materials, to financing inventory, to bridging the time before invoices are paid.
Capital, often totalling millions of pounds, can become bound up in the supply chain, making usual operational practices difficult – or worse, impossible. It’s an issue with the potential to affect businesses of all sizes, with small and medium-sized enterprises (SMEs) and start-ups particularly vulnerable. A lack of liquidity to support day-to-day business activities – where investors, reserve funds and other sources of financing are not an option – can be extremely damaging. To avoid this, organisations must find ways to optimise cash flow, pay suppliers on time, and reduce the risk of supply chain breakdown.
That’s where supply chain finance – and how it factors into wider enterprise resource planning (ERP) – can offer an efficient, reliable solution.
What is supply chain finance (SCF)?
The overriding factor for most businesses is simple: profit. How to make it, how to capitalise on it, how to maintain it. In order to reach this point, all businesses require some form of financing – either as working capital to support daily operations, or investment.
Supply chain finance, also referred to as supplier finance and reverse factoring, is a form of cash advance. It’s a means for suppliers to receive early payment through third-party funding. While often confused with trade finance, receivables finance and invoice finance – each a type of funding designed to help companies to manage cash flow – there exist key differences.
SCF refers to scenarios where a buyer approves a supplier invoice to be funded by a third-party intermediary – for example, a bank – in order for the supplier to receive payment more quickly than they otherwise might. It’s a solution based on creditworthiness: it offers both a way for businesses to benefit from higher credit ratings of buyers, and a way for buyers to extend payment terms. As such, it offers a win-win situation for all involved.
PrimeRevenue, a global leader in working capital financial technology solutions, highlight five key factors of supply chain finance:
- It is not a loan. Supplier finance is an extension of the buyer’s accounts payable. It is not considered financial debt. Where suppliers are concerned, it represents a true sale of receivables.
- It does not need to be tied to a single bank. Multibank capability is available, linking to financial institutions worldwide.
- It is not factoring. Supply chain finance solutions can provide zero recourse burden for suppliers – except a small transaction fee – once an invoice is paid.
- It is not just for large companies. Supply chain finance can provide value for SMEs with differing credit ratings and finance capabilities.
- It does not require a bank. Various lender models are available, including: buyer self-funding – with no participation from a bank; multi-funder programmes, where financing is split between a buyer, capital markets and finance providers; and bank-run options.
How does supply chain finance work?
Supply chain finance works differently depending on the functionality of any given individual programme. However, generally speaking, its mechanics involve three key players: the supplier, the buyer, and the funder. In most instances, the SCF process is as follows:
- The supplier uploads an invoice to the supply chain finance platform.
- The buyer approves the supplier’s invoice for payment.
- The supplier selects chosen invoices for early payment via supply chain finance.
- The supplier receives payment immediately, with a small fee deducted.
- The buyer pays the funder in full on the invoice due date.
Benefits of supply chain finance
There’s a good reason that supply chain finance solutions are popular: they have the potential to improve the outcomes and prospects for both suppliers and buyers.
On the supplier side, SCF liberates millions of entrepreneurs and businesses held back by limited fixed collateral and/or poor credit ratings to kick-start – or develop – their operations. Early payment enables them to reduce days sales outstanding (DSO); namely, the average number of days taken to collect sales payment. As well as accessing lower cost of funding, it supports healthier balance sheets – due to improved cash flow and cash flow forecasting – integral to business expansion, innovation, and an ability to make better-informed business decisions. Additionally, the advanced technology platforms involved in SCF programmes and finance products mean businesses can benefit from user-friendly, intuitive interfaces – ideal for full visibility over the payments process and measuring the efficiency of operations.
For buyers, there are also numerous benefits. One of the most critical is the ability to extend days payables outstanding (DPO), delaying payment until the invoice due date. SCF serves to improve working capital position, reduce supply chain risk, strengthen supplier relationships and networks, and gain advantage in negotiations. It also supports business growth and accelerated sales as suppliers are more easily able to keep up with demand.
However, SCF solutions are not an unmitigated success for capital markets across all areas of the global supply chain. Despite their popularity in many parts of the world, it can be a different story for financial services and institutions in emerging economies. Many find it challenging to offer supply chain finance programmes and products due to a lack of technological capacity, resources, infrastructure and awareness.
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From evaluating macro supply chain issues to understanding the practical tools of chain management, your studies aim to give you in-depth insight into the leadership and management of global supply chains and the wider business environment. This flexible programme combines specialist knowledge of supply chains – including strategic procurement, logistics and operations strategy – as well as marketing, finance and fintech, people management, and more.