Supply Chain Finance, sometimes referred to as Reverse Factoring, is a financial solution that works to the advantage of both sellers and buyers. Initiated by the buyer, the program works to allow both sides of the transaction to benefit from greater cash liquidity, enabling both sellers and buyers to produce and grow while minimizing the need for a loan or traditional factoring or invoice sales to increase available funds.
Since the arrangement is mutually beneficial, Supply Chain Financing also creates stronger supplier/buyer relationships, improves market stability, and keeps both buyers and sellers better aware and in control of their accounts payable and accounts receivable situations.
Why Is Supply Chain Financing Needed?
To keep customers happy and businesses thriving, the supply chain must work in an uninterrupted cycle. On the physical side of the supply chain, suppliers create components for products, buyers manufacture the end product, retailers sell the product, and consumers buy the product.
On the financial side of the supply chain, consumers pay retailers for the product, retailers pay the manufacturers, and manufacturers pay suppliers. This cycle of production and payment is required for continued company growth and consumer satisfaction.
At both the beginning and end of the cycle, the supplier can be in a difficult position. Suppliers create their products and sell them to buyers. They issue an invoice, then wait for payment. It’s not uncommon for an invoice to be due 30-120 days after it is issued.
During that time, the supplier must continue to manufacture their product, as well as pay their rent, pay their employees, and pay insurance as well as other costs. They carry this burden while waiting on a payment that may or may not arrive by the invoice due date.
It can be difficult for suppliers to keep up. Under these circumstances, some may feel compelled to leave the industry. The loss of suppliers leaves buyers in the lurch.
Unable to source components for their end product, buyers are forced to delay manufacturing and sales. This is costly to them and disappointing to retailers and consumers who then may turn elsewhere for their needs, possibly permanently damaging the buyer’s reputation.
Unfortunately, paying supplier invoices early can strain buyers’ financial situations. It’s also not uncommon for invoice processing to take a few weeks, making it harder for buyers to commit to a program for early payment for suppliers. Additionally, buyers, too, require funds for their business needs.
These needs include funds for charges incurred by being in business as well as cash needed to grow and expand, growth being a potential benefit to the very suppliers who are awaiting payment!
What Is Supply Chain Financing?
Supply Chain Financing is a solution designed to improve cash flow for both suppliers and buyers. Buyers first establish a relationship with a financial institution. After they are evaluated and approved for Supply Chain Financing, buyers invite sellers to be part of the relationship.
With this arrangement, buyers negotiate invoice terms and due dates with suppliers. Suppliers then generate invoices that reflect these new terms. The terms generally include extended payment periods that grant buyers payment terms that can extend up to 364 days from the invoice date.
In exchange for the extended payment period, suppliers have the option to be paid early, less a fee, by the financial institution. If suppliers take advantage of the early payment option, the buyer is now responsible for paying the financial institution for the invoice.
Supply Chain Financing is a straightforward and mutually beneficial solution for suppliers and buyers. Both companies have greater cash flow, which results in less strain and greater productivity and growth potential.
How Do Buyers Benefit?
Buyers benefit from Supply Chain Financing because longer payment terms enable them to have more funds available to keep production moving without costly interruptions.
Since they don’t have to worry about paying their suppliers immediately, Supply Chain Financing also provides funds for new ventures and projects without the need for a traditional loan. With Supply Chain Financing, only the payee of the account is changed; there is no formal loan of funding that the company would need to declare to stakeholders.
Buyers also benefit from improved relations with their suppliers. The accounts receivable and accounts payable process can be tedious and contentious. When the financial institution is involved, much of the process becomes technology-based.
Invoices are sent to the buyer by the supplier, the buyer approves the invoices, and, if the supplier desires an early payment, they handle that with the financial institution, not the buyer. There are no repeated calls and queries to manage; no need to put off the supplier regarding early or delayed payment.
The supplier/buyer relationship is strictly purchase and provide based and no longer bound up in possible financial disagreements.
Suppliers have greater confidence and a more positive relationship with buyers, creating a better working atmosphere and a clearly mutually beneficial endeavor.
How Do Suppliers Benefit?
Buyers are typically the larger of the two companies in a buyer/supplier relationship. Since Supply Chain Financing is based on buyer credit rating, the suppliers receive better rates than if they were to establish an arrangement on their own merit.
The program allows suppliers greater flexibility by enabling them to extend invoice due dates beyond what is financially practical to them while simultaneously collecting payment (minus a small fee) earlier than would be possible with a traditional payment schedule.
Essentially, it is as though the supplier has extended a discount to the buyer for early payment, but the deal is guaranteed to be accepted and honored through the payment by the financial institution.
Supply Chain Financing also frees the supplier from spending resources on collecting late payments. With the nature of the relationship less toilsome, suppliers have increased confidence in and respect for the buyer.
Suppliers still retain the ability to allow the invoice to remain with the buyer and collect the full payment on the agreed upon date. With this flexibility, the supplier has more options regarding how to manage funds and how to look to the future regarding financial needs and timelines for receiving payment.
Supply Chain Health
Supply Chain Financing strengthens the supply chain from beginning to end. Although they are unaware of it, end consumers reap the benefits of greater market stability enjoyed by suppliers and buyers as a result of Supply Chain Financing.
In an increasingly global marketplace, Supply Chain Financing is the FinTech solution to easing the strain of producers’ accounts payable and accounts receivable. By digitizing the process through the uploading of invoices and online approval and payment, funds can be placed where they need to be at the press of a button and without piles of unnecessary paperwork or repeated phone calls regarding payment.
Efficiency is increased and marketplace focus is maintained. The healthy supply chain resulting from Supply Chain Financing is a boon to everyone in the supply chain, ensuring a consistent and healthy market for all.