What is supply chain financing?

Supply chain finance improves payments between companies and their suppliers. Supply chain finance programs are a set of solutions that optimize a business’s cash flow while extending payment terms to their supplier. Additionally, it provides the option for SME and large suppliers to get early payments on invoices.

Supply chain financing provides advantages for the buyer and supplier. The buyer takes advantage of working capital, while the supplier generates more cash flow. The financing solutions are implemented in a couple of different ways: reverse factoring and supplier finance.

Large companies use reverse factoring as a post-delivery financing option to extend their payment terms without affecting their supply chain. Without using this method, suppliers would have to deal with the cash flow issues that follow slow payment terms. So, reverse factoring helps the supply chain by providing a way to finance slow-paying invoices.

Supplier finance is a pre-delivery financing option that allows a supplier to purchase raw materials or finished goods to meet purchase orders. Additionally, a supplier that expects an increase in orders and wants to stock inventory to fulfill those orders would use supplier financing.

How does supply chain finance work?

Reverse factoring and supplier financing work differently. Both are win-win situations for buyers and sellers.

Reverse factoring

This is the most common form of supply financing. A company using reverse factoring signs an agreement with a supply chain finance company. The supply chain finance company handles the accounts receivables so suppliers can get early payments on net-30 to net-60 approved invoices. The company handling the reverse factoring collects payment once the invoice matures.

What are the advantages of reverse factoring?

  • It helps improve a supplier’s cash flow by providing early payments on customer invoices

  • Reverse factoring fees are based on the company’s creditworthiness. The fee is usually relatively low for the supplier as large companies typically have good credit ratings.

What are the disadvantages of reverse factoring?

  • Suppliers can only use reverse factoring if the company offers a reverse factoring program
  • Reverse factoring is specific to the customer (company). If a supplier has payments from multiple customers, they can only use reverse factoring with the customers that offer a program

  • A supplier can only get funding after the product has been delivered and the invoice is approved, not before

Supplier finance

Supplier finance is a pre-delivery financing method allowing manufacturers and distributors to purchase raw materials or finished goods to fulfill large orders or stock up on inventory. The supply chain finance company acts as the middleman between the company and the supplier.

The supplier finance process works slightly differently than the reverse factoring. When a company buys materials, instead of placing the order through the supplier, they place it with the supply chain financing company. The finance company then places the order through the supplier. Since they are extending the company trade finance, they will handle the payments.

The supplier delivers the goods directly to the company once they get the purchase order. The company then issues an invoice from the supply chain financing company, usually payable in net-30 to net-60 credit terms.

What are the advantages of supplier finance?

  • It’s a useful tool to grow business and build or stock inventory
  • No lien is filed on the company’s assets that use supplier finance. Other financing methods a company uses are uninterupted.
  • It’s available to small and midsized manufacturing companies or product suppliers.

What are the disadvantages of supplier finance?

  • Supplier finance only works for companies that can be credit insured

  • Only helps a company with the cost of finished goods or raw materials. No other expenses are covered.

Are you looking for a new source of financing?

Porter Capital is a leading financial institution working with manufacturers and distributors to get them the funding they need fast. Get in touch with us today to see how we can help finance your business.