Supply chain finance solutions also known as supplier finance or reverse factoring solutions – buyers, suppliers, and third-party financing institutions- in order to lower financing costs and improve business efficiency in a mutually beneficial relationship. This process optimises cash flow for both the buyer and the seller. Using such supply chain finance solutions can allow buying organisations to extend their payment terms while stabilising their supply chain while suppliers can get paid early.
These supply chain finance solutions strengthen the supply chain by optimising the buyers’ working capital, and generating additional operating cash flow to the supplier, thus minimising risk across the supply chain.
How does it work?
1. The supplier sends their invoices to the buyer after a product or service has been delivered.
2. The buyer approves the invoices which gives the supplier access to funds at the desired date.
3. At any time, the supplier is able to log on to the supply chain finance platform to see all the approved invoices. The supplier may do nothing and funds will settle directly in the supplier’s bank account on the original maturity date, or the supplier may draw down the funds for advance payment with a small fee.
4. If traded before maturity, 100 percent of the invoice—less a small financing fee or discount—is transferred electronically to the supplier’s bank account. In most cases, the supplier is paid within the next business day. Since funds from the financial institution are advanced based on the buyer’s promise to pay on the original maturity date or extension date if requested, financing rates are generally based on the buyer’s risk, not the supplier’s. Therefore, financing rates are very attractive.
5. At the maturity date determined, the buyer pays the full invoice amount to the third-party financier.
How are these supply chain finance solutions similar to invoice discounting?
Invoice discounting and supply chain financing both serve as a tool for the same purpose, to free up cash flow. Invoice discounting increases working capital for the SME (supplier) when they sell invoices at a discount to the financier. With this SCF solution, the buyer asks the financier to offer early payment to their supplier which in turn increases cash availability for both the supplier and the buyer.
Benefits of these supply chain finance solution:
- Removes the need to use available working capital to pay suppliers
- It extends buyers’ trade credit days & allows buyers to use payment cycle to the fullest
- Enables buyers to pay suppliers early taking advantage of early payment discounts
- It is a flexible source of financing with no obligations
- No security is required (no collateral is required)
- Not considered debt, therefore it strengthens your balance sheet
- There is no recourse burden on the supplier once the invoice is paid. Since the agreement is made between the buyer and the financier for payment at the end of the credit term, there is no recourse on the supplier.
- It is not exclusive to large companies
Where can you find these supply chain finance solution?
InvoiceInterchange is a one-stop shop as it provides multiple types of financing to cater to each company’s individual goals. Our user-friendly platform can help you get financing in 24 hrs.
