What is Supply Chain Finance?
Supply chain finance is a type of monetary activity that provides solutions to optimize cash flow. This allows the seller to sell its invoices to a bank with the knowledge and approval of the buyer. This whole process makes it possible for the buyer to pay at a later time and for the seller to receive payment earlier.
Many supply chain experts and managers view supply chain finance as a great way to resolve issues with suppliers. The system benefits both the supplier and the buyer to improve their working capital which is an important factor to protect against financial issues.
Note: Supply chain finance can also be termed as supplier finance or reverse factoring
How Supply Chain Finance Works
Supply Chain Finance allows two crucial scenarios. First, buyers receive prolonged invoice due dates which may be twice the original length of time. Second, suppliers can extend credit to buyers while receiving early payments on the approved invoices.
Everything starts with the buyer. The buyer enables supply chain finance by using a software platform provided by industry experts in supply chain finance. The buyer determines suppliers who can participate in the program.
After suppliers are determined and an invitation to participate in the program had been sent, the suppliers who accepted the invitation will be onboarded. On-boarding can be complex for buyers, however, should be carried out properly to make sure suppliers will complete the entire process to participate in the program.
Suppliers who have completed onboarding can issue invoices to the buyer based on the agreed payment and terms. To pay suppliers, loan companies or funders offer early settlement for outstanding invoices less a small fee.
The supply chain finance procedure is highly synchronized and intended to ensure that there is smooth and fair trading. The buyer and seller are completely advised of the process. They consent to take part to the shared benefit of both ends.
How Supply Chain Finance Helps in Thriving Businesses
Thriving businesses benefit from the supply chain in many ways. The prime benefits are as follows:
- Optimize working capital
- Supplier Chain stability
- New deals and opportunities
- Stronger business relationships
Supply chain finance offers businesses an opportunity to grow. Particularly smaller companies that lack the cash. There’s no doubt that working capital is the life of any running business. Supply chain finance brings in a new working capital that all participants can benefit from.
With suppliers becoming more susceptible to global financial shocks, benefiting from early payment on invoices helps them to cope with such economic shocks. With no supply chain finance, some major participants in the supply chain may opt to depart the supply chain. This might be because of undesirable payment terms.
A player who decides to depart the supply chain can significantly raise red flags leading to holds off and ripple consequences further. By providing players an opportunity to take part in supply chain finance, all players in the supply chain will benefit as a result of continuous operation without interruption.
Supply chain finance can help companies create better working relationships. By enabling participants to remain inside the supply chain, better deals could be made that that could not have been possible if the main participant departs.
Businesses can function together with full confidence. Revolutionary, extensive projects could be pursued knowing that an essential buyer or supplier is going to be around for the longest time. These kinds of associations produce stability and more opportunities throughout the entire supply chain.