According to a Supply Chain Finance Global Market Report, the supply chain finance market size will reach $8.86 billion in 2027. This only means that supply chain finance shows no signs of slowing down, considering the volume and strength of trade transactions.
For supply chain finance (SCF) to thrive, it should have an uninterrupted flow of goods and services. As suppliers rely on timely payments to maintain their cash flow, longer payment terms can affect their financials and can hurt their business. SCF resolves this challenge by providing options for suppliers to increase their resources. It provides stability and flexibility by increasing efficiency and reducing overall costs.
What is supply chain finance?
Supplier chain finance, also referred to as reverse factoring, is a cloud-based finance solution that allows suppliers to receive early invoice payments. This solution enables suppliers to optimise their working capital and maximise liquidity.
SCF automates transactions to eliminate redundant steps and speed up processes from invoicing to payment. While supply chain finance may be used as a general term to encompass many supplier financing solutions, it has unique merits.
In essence, SCF provides suppliers with distinct advantages, including quick and convenient access to money that buyers owe. With the primary objective to ensure operations run smoothly, SCF simplifies complex processes.
How does supply chain finance work
Supply chain finance is a collaboration between the supplier and the buyer. In most cases, the buyer's attempt to delay payment creates a rippling effect on the supplier, as delayed payment could mean low cash flow for suppliers. Supplier finance is an option that sources capital from the bank so suppliers will receive immediate payment despite extended payment schedules.
For the supplier to benefit from the program, the buyers must agree with an SCF provider. Typically, SCF sources its funds from a single bank or any finance provider. Still, there are cases when programmes obtain funds from a multi-funder, executed through a dedicated software or platform.
SCF is not a bank debt but an on-balance sheet arrangement. Buyers should take note of this classification for a supply chain finance program to be successfully implemented.
- The buyer needs to look for a financial institution that can sometimes be in the form of multiple lenders that will agree to fund the programme.
- The purchaser reviews outstanding invoices and selects suppliers eligible for early payment. Once done, the buyer will post this using an SCF system.
- The supplier must register for the SCF program to access approved invoices. From these invoices, the supplier will choose which it would like to receive early payment from.
- The transaction will incur a financing fee that the supplier shoulders for the money to be paid to their account.
- The purchaser will arrange repayment scheduled after the due date of the initial invoice or depending on the lender's terms. The buyer will pay the supplier based on their agreed payment schedule. The payment will include everything that should have been paid earlier.
Types of supply chain financing
Supplier financing
This type of financing improves suppliers' cash flow as they receive early payment for their invoices, reducing their dependency on traditional finance options. Different methods, such as factoring, are used for supplier financing to become available to suppliers. It works when a third-party financier buys the invoices at a reduced rate, and the buyer provides early payment in exchange for a discounted price.
Purchase order financing
With this type of financing, suppliers can fund large purchase orders that the buyers have initiated. This option benefits suppliers by giving them sufficient resources to provide goods or services promptly. This financing option suits businesses needing additional funds to fulfil large orders. Purchase order financing keeps companies on their feet by helping them sustain their supply chain flow while giving them opportunities to grow.
Inventory Financing
Inventory financing helps suppliers secure a loan by using inventory as collateral. This option benefits businesses experiencing seasonal fluctuations or any inventory-related issues by leveraging the inventory's value.
Export and import financing
Sustaining the business is one of the challenges that international trade faces when resolving challenges related to cross-border transactions. This is where export and import financing comes into play. This type of financing helps importers manage cash flow, pay suppliers in foreign currencies, and mitigate international trade risks.
Supplier Risks That Supply Chain Finance Can Mitigate
- Financial risk: Facing financial challenges is inevitable for most suppliers and such risks can affect their ability to deliver goods or services in a timely manner. Even economic downturns can put a strain on supplier's financial health. With SCF, suppliers receive early payment, reducing the risk of cash flow issues.
- Operational Risks: Production delays, labour disputes or quality control problems can have a serious impact on the supply chain. SCF has shared risk management strategies that handle unforeseen disruptions. With its collaborative financing models, risk-sharing will be between suppliers and buyers.
- Dependency Risks: When suppliers rely on traditional bank loans, they only have a single financial institution to depend on. Without a diversified source of funding, the risk associated with a lender's instability is high. SCF addresses this challenge by providing suppliers with diversification of funding.
- Market Volatility: SCF has dynamic discounting that stabilises prices for both suppliers and buyers. These features reduce the impact of market volatility on supply chain.
- Supplier Relationship Risks: Fostering trust between buyers and suppliers requires maintaining strong supplier relationships by offering financial support and early payments. When there is trust, suppliers also reduce the risks of disruptions and disputes.
Implementing Supply Chain Finance Solution
Implementing supply chain solutions requires a solid strategy. For suppliers to enjoy the full benefits of SCF, it is essential to follow these key steps:
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Evaluate supply chain
The first thing to identify is the areas where supply chain finance will thrive. The assessment will analyse working capital requirements, supplier relationships, or payment terms.
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Select an SCF solution
After evaluation, the next step is to choose a financing technique aligned with the business's objectives and goals.
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Choose an SCF provider
A reputable financial institution is vital to the success of the implementation. When selecting a provider, choose the one that can yield the desired outcome. Some qualities to consider include a robust technology infrastructure and solid experience in the industry.
Supply chain finance is focused on increasing suppliers' access to finance and providing much-needed agility by utilising technology to refine processes. Suppliers considering this route must have a significant amount of commitment to achieve greater profitability and sustainability.
POINTRADE understands that the supplier journey is not easy, but we are here to help you streamline your operations, secure your working capital and optimise your cash flow. Call POINTRADE today and experience the transformation.