If your small business supplies goods or services to large customers, supply chain financing is right for you. Supply chain financing is also commonly called reverse factoring, and it is a form of factoring in which the high credit of a large purchaser is substituted for the credit rating of a supplier to get a lower factoring cost to the supplier. This results in a win-win situation for both the buyer and supplier and each can use the cash for other operations. The buyer can optimize the working capital, and the supplier generates additional cash flow.
Things You Need to Know About Supply Chain Financing
- It is not a loan: supply chain financing is an extension of the buyer’s accounts payable, and not financial debt.
- It is not tied to a single bank: supply chain finance has multibank capability.
- It is not for only large companies: it is ideal for any business no matter the size.
Supply chain financing works best when the buyer has a better credit rating than the seller. This allows for buyers to negotiate better terms like extending payment schedules. The seller then can receive payment immediately.
Who Benefits from Supply Chain Financing?
Supply chain financing benefits for companies including electronics, automotive, retail, manufacturing and more. It works for companies that are on both sides of the supply chain. Unlike other types of receivable finance techniques like factoring, supply chain financing is set up by the buyer instead of the supplier.
Benefits for the suppliers:
- Optimize working capital
- Little financial risk - insurance is sorted through a supply chain financier
- Access lower cost funding
- Improve cash forecasting accuracy
- Helps provide liquidity and reduces financing costs
- Does not cost extra for the supplier
- Suppliers can get paid earlier than their usual 30-day credit terms
Benefits for the buyers:
- Optimize working capital
- Buyers can maintain a healthy balance sheet
- Improve the health of the supply chain
- Strengthen relationships with suppliers
- Buyers can work with complex end-to-end supply chains
- Promotes competition/ diversity in suppliers
How Does Supply Chain Financing Work?
The buyer enters into an agreement with a supply chain finance provider and invite suppliers to join. Some programs that have supply chain finance are funded by a finance provider or a single bank. When the supply chain financing program is up and running, the supplier can request early payment on the invoices.
The Supply Chain Finance Process
- Buyer purchases goods or services from the supplier
- Supplier issues their invoice to the buyer with a payment due date
- Buyer approves invoice payment
- Supplier requests early payment on the invoice
- Funder sends payment to the supplier
- Buyer pays the funder on the due date on the invoice