Supply chain finance (SCF)
Also known as supplier finance or reverse factoring, is a financial solution that optimizes cash flow in a supply chain by allowing buyers to extend payment terms to suppliers while enabling suppliers to receive early payment through a third-party financier (usually a bank or fintech platform). It leverages the buyer's strong credit rating to provide low-cost financing to suppliers, reducing risks and improving liquidity for all parties involved.
Brief Steps in Supply Chain Finance:
1. **Purchase and Invoicing**: The buyer orders goods or services from the supplier, who delivers them and issues an invoice with agreed payment terms (e.g., 60-90 days).
2. **Invoice Approval**: The buyer reviews and approves the invoice, confirming the debt is valid.
3. **Financing Arrangement**: The approved invoice is submitted to a financier (e.g., a bank). The financier pays the supplier early (e.g., within days) at a discounted rate, based on the buyer's creditworthiness.
4. **Repayment**: The buyer repays the financier the full invoice amount on the original due date, while the financier earns a fee from the discount or interest.
Example of Benefits:
Imagine a large retailer (buyer) like Walmart purchasing inventory from a small manufacturer (supplier) of electronics. Without SCF, the retailer might pay the supplier in 90 days, straining the supplier's cash flow as they wait for payment while needing funds for raw materials and operations.
With SCF:
- **Benefit to the Buyer (Retailer)**: They can extend payment terms to 90 days or more, preserving their working capital for other investments (e.g., expansion or marketing). This improves their cash conversion cycle and reduces borrowing needs, potentially lowering overall costs.
- **Benefit to the Supplier (Manufacturer)**: They get paid by the bank in just 10-15 days at a small discount (e.g., 1-2% of invoice value), improving their liquidity. This allows them to pay their own vendors promptly, avoid high-interest loans, and even negotiate better terms for raw materials. The financing rate is lower than what the supplier could get independently, thanks to the buyer's strong credit.