What Is Supply Chain Finance?

Supply Chain Finance (SCF), also known as supplier finance or reverse factoring, is a financial solution that ensures suppliers receive early payment on their invoices, reducing the risk of disruptions in the supply chain. This mutually beneficial approach optimizes the working capital for both buyers and suppliers without the complexities of traditional financing methods.

Unlike traditional receivables financing, where the supplier initiates the process, SCF is set up by the buyer. In this arrangement, suppliers can access financing at a cost based on the buyer's credit rating, resulting in lower financing costs. This buyer-centric model allows for a smoother financial flow between partners, promoting better collaboration.

To initiate SCF, a buyer partners with a finance provider, inviting suppliers to join the program. Technology-driven solutions now enable businesses to extend SCF to hundreds or even thousands of suppliers worldwide. Once the program is in place, suppliers can request early payment on their invoices, and the process unfolds as follows:

1. Buyer purchases goods or services from the supplier.
2. Supplier issues an invoice with a specified payment term.
3. Buyer approves the invoice for payment.
4. Supplier requests early payment on the invoice.
5. Finance provider pays the supplier, deducting a small fee.
6. Buyer repays the finance provider on the original invoice due date.

Some companies may choose to implement both SCF and dynamic discounting for flexible funding. This approach allows businesses to switch seamlessly between the two models based on their cash flow needs, providing a tailored financial strategy.

Why is supply chain finance important?
SCF is crucial for optimizing working capital and maintaining strong buyer-supplier relationships, utilizing a third-party factor to facilitate early payments.

What's the difference between supply chain finance and factoring?
SCF, also known as reverse factoring, differs from factoring as it is initiated by the buyer, leveraging the buyer's credit rating.

How do I choose a provider for supply chain finance?
Consider factors such as the provider's size, flexibility, compatibility with existing systems, and the extent of their supplier network when selecting an SCF provider.