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.
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.
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.
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.