What is supply chain finance?
Supply chain finance, or SCF, is a term describing a set of tech-based business and financing solutions that aim to lower costs and improve business efficiency for parties involved in a sales transaction. These solutions help optimize cash flow by allowing companies to extend their payment terms to their suppliers, which in turn allows suppliers to receive early payment on their invoices.
There are many reasons why companies should assess supplier financial stability. A 2019 research report from Business Continuity Institute found that 41.9% of organizations experienced one to five supply chain disruptions. Supply chain finance reduces the risk of supply chain disruption and creates a win-win for both the company and the supplier—it’s another way to safely guard against any disruptions in the supply chain.
While suppliers gain quicker access to money they are owed, businesses receive more time to pay off balances. They use technology to automate their transactions and track invoice approvals and processes. With this, they agree to approve their suppliers' invoices for financing by a bank or other outside financier.
Four things to note about supply chain finances include:
- It is not considered debt – for the supplier, it represents a true sale of the company’s receivables.
- Business are not subject to use a single bank – supply chain finance allows for multibank capability and also provides opportunities to run the program on a multi-funder basis.
- There is no factoring – 100 percent of each invoice is paid to the supplier.
- It is not just for large companies – supply chain finance can provide value for businesses/supply companies of all sizes and credit ratings.
How does supply chain finance work?
Supply chain finance works best when the buyer has better credit than the seller and can obtain capital from a financial provider at a low cost. This advantage lets buyers negotiate better terms from the seller like extended payment schedules. Meanwhile, the seller can unload its products more quickly, to receive immediate payment from the intermediary financing body.
For example, let’s say a food and beverage company purchases goods from a third-party supplier. Traditionally, the supplier would ship the materials, then submits an invoice to company for payment—which often is approved in 30 days. But if the supplier is in dire need of cash, it may request immediate payment, at a discount, from the financial partner of the food and beverage company. If allowed, that financial institution issues immediate payment to the supplier while extending the payment period by another 30 days for the food and beverage company.
Ultimately, this methodology encourages collaboration between the company and suppliers and counters the competitive dynamic that typically arises between two business parties. Allowing for this process limits the possibility of traditional circumstances, in which the company normally attempts to delay payment while the supplier looks to be paid as soon as possible.
While businesses have traditionally focused on onboarding multiple suppliers, technology-led solutions help companies offer supply chain finance to thousands of third parties. This is made possible by providing user-friendly platforms and streamlined supplier onboarding processes which makes it simple to onboard large numbers of suppliers rapidly and with minimal effort, especially as companies rethink their supply chains amid the COVID-19 pandemic.