What’s supply chain finance?
Supply chain finance (SCF) is a solution that optimizes cash flow by allowing companies to extend their payment terms to their providers and to offer the option of early payment for their suppliers. SCF is also known as reverse factoring or supplier finance.
SCF operates through the automation of invoice acceptance and payment procedures, from submission to completion.
This is the best way to optimize cash flow by helping companies to extend their payment conditions to the suppliers. Furthermore, this helps provide suppliers with an early payment option. For both buyers and suppliers, this is a win-win situation. This optimizes the buyers’ working capital and provides some extra cash for operation.
This financing allows the company more cash to raise its working capital and suppliers gain increased cash flow so all these aspects will effectively be minimizing the risk across the supply chain.
In simple word, SCF allows a supplier to sell its invoices to a bank at a discount as soon as they are approved by the buyer.
How does supply chain finance work?
SCF is the coordination between the organization, supplier, and the financing bank or other financial providers. It works best when the buyer has a better credit rating.
Furthermore, the buyer can negotiate better terms from the supplier and the supplier can deliver the materials to get the immediate payment from the intermediary financing body.
The below parties are involved in supply chain financing.
- Buyer
- Supplier/Vendor
- Bank/Financial institutions
- Supplier sends their invoices to the buyer, and then the buyer approves those invoices and uploads to the SCF platform
- Supplier log on to the SCF platform and see the approved invoices and amount
- If supplier agree on the approved invoices and then settlement have done immediately by deducting a small financing fee or discount by the bank/financial institution
- At the due date, the buyer pays to the bank/financial institution
Benefits from supply chain finance?
Buyer:-
- Reduce cost of purchase
- Optimise Working capital requirment
- Supplies become stable
- Improve credit rating
Supplier:-
- Reduce the Days payment outstanding
- Lower financing cost
- Streamline cash flow
- Improve efficiency
Bank/Financial Institution:-
- Increase in revenue
- Increase in the number of customers
