Supply chain financing is a type of financing that involves a third party, usually a bank or a financial institution, that provides liquidity to both buyers and suppliers in a supply chain. Supply chain financing, also known as reverse factoring, helps businesses improve their cash flow by letting them pay their suppliers over a longer period of time, while giving their large and small suppliers the option to get paid early.
How does supply chain financing work?
Supply chain financing works as follows:
- A buyer places an order with a supplier and agrees on the payment terms, such as 60 or 90 days.
- The supplier delivers the goods or services to the buyer and issues an invoice.
- The buyer approves the invoice and sends it to the financier, who verifies it and offers to pay the supplier immediately at a discount.
- The supplier can choose to accept the offer and receive the payment minus the discount, or wait until the due date and receive the full payment from the buyer.
- The buyer pays the financier the full invoice amount on the due date.
What are the benefits of supply chain financing?
Supply chain financing can offer many benefits for both buyers and suppliers, such as:
- Improved cash flow: Buyers can extend their payment terms and optimize their working capital, while suppliers can access immediate cash and reduce their days sales outstanding (DSO).
- Reduced costs: Buyers can negotiate better prices or discounts from their suppliers, while suppliers can lower their financing costs and avoid late payment fees or penalties.
- Enhanced relationships: Buyers can strengthen their relationships with their suppliers by offering them flexible payment options and improving their cash flow. Suppliers can increase their loyalty and trust with their buyers by delivering on time and meeting their quality standards.
- Increased efficiency: Buyers and suppliers can streamline their invoice processing and payment transactions by using technology-based solutions that automate and track the supply chain financing process. They can also reduce errors, frauds, or disputes by using verified invoices and payments.
How to use supply chain financing?
To use supply chain financing, you need to follow these steps:
- Find a suitable financier: You need to find a reputable and reliable financier that offers competitive rates and terms for supply chain financing. You should compare different financiers based on their fees, advance rates, funding speed, customer service, and industry expertise.
- Sign an agreement: You need to sign an agreement with the chosen financier that outlines the details and conditions of the supply chain financing service, such as the duration, frequency, recourse or non-recourse options, confidentiality clauses, and termination clauses.
- Submit invoices for financing: You need to submit your invoices for financing to the financier, along with any supporting documents, such as purchase orders or delivery notes. The financier will verify the invoices and offer to pay your suppliers immediately at a discount.
- Inform your suppliers: You need to inform your suppliers about the supply chain financing option and encourage them to accept the offer from the financier. You can also provide them with access to the financier's online platform or portal where they can view and manage their invoices and payments.
- Pay your financier: You need to pay your financier the full invoice amount on the due date.
Conclusion
Supply chain financing is a win-win solution for both buyers and suppliers in a supply chain. By using a third party financier, buyers can improve their cash flow and reduce their costs, while suppliers can access immediate cash and enhance their relationships. Supply chain financing also increases efficiency and transparency in the invoice processing and payment transactions.
