Supply Chain Finance: Balancing Receivables and Payables

As a relatively new way to provide businesses with liquidity, full supply chain finance can supplement age-old factoring services by providing cash flow solutions to both a company’s upstream and downstream partners. Whereas factoring focuses on financing the seller alone, supply chain finance caters to the various transactional needs of all parties along the supply chain who are involved in trade exchanges. In this way, buyers and suppliers benefit from such advantages as faster, or greater, access to working capital and longer payment terms. International factoring companies often offer both export factoring alone and full supply chain financing.

Factoring, in broader terms, is a transactional approach in which a factor buys a company’s accounts receivable, and in turn, advances up to 90% of the value of the invoices upon shipping, on day 1, so the company doesn’t have to wait 30, 60, or 90 days to get paid. The factor also takes over collecting payment for each receivable. Apart from factoring, other methods exist in which an outside lender buys receivables.

Invoice discounting is another option beside factoring. It’s a more wholesale arrangement often based on selling the debtor’s entire ledger, and unlike factoring, the borrower manages the collection of the receivables themselves. There are some disadvantages to this approach including that it can be invasive to the borrower with the detailed reporting involved, with the disclosure requirements that are non-confidential, and with the burden of making arrangements with customers and audits. Also, businesses, such as retailers, who have fewer invoices or those who operate businesses in sectors that aren’t popular with lenders, don’t have invoice discounting as a funding option.

How Supply Chain Financing Works

Supply chain finance offers broader financing. While factoring and invoice discounting look up the supply chain and deal with the company’s customers, using their debts as collateral in financing arrangements, supply chain finance looks the other way as well – going down the supply chain toward the suppliers. International factoring companies like Tradewind Finance can finance a company’s complete supply chain by using risk mitigation and financing approaches that optimize the management process regarding liquidity and working capital.

There are two broad kinds of supply chain financing, which could be described as either buyer-initiated, or supplier-initiated.

With buyer-initiated approaches, the buyer asks the lender to make the payments to the supplier directly. Payments might be made in advance or on the date they are due with the buyer being charged a fee. The buyer repays the lender on the date agreed.

A supplier-initiated approach lets suppliers join the program, then ask for payment early on approved invoices prior to their due date. In return, the supplier will receive payment from the lender in advance with the finance fee deducted, and the lender gets repaid by the borrower on the set due date.

Reasons to Use Supply Chain Financing

There are many reasons you might want to consider using supply chain financing for your business needs. Here are a few of the main ones:

• It helps buyers improve their cash flow position by extending payment terms to suppliers; this allows the buyer to better manage payment cycles and fund growth.

• In situations where suppliers have difficulty accessing financing, supply chain finance provides them with additional cash, positioning them to churn out consistent supply and increase their volume of production.

•  If there is a shortage of suppliers for a certain product, buyers can have the upper hand by offering this type of finance as suppliers benefit from fast funding, high advance rates, and better financial positions due to debt being removed from their balance sheet.

The Upshot of Supply Chain Financing

If you are looking for a way to access working capital and build strong relationships with quality suppliers, supply chain financing might be the answer to achieve that goal. It can help you secure the funds you need to grow your business, while accommodating your suppliers’ liquidity needs as well. Your suppliers will benefit from your finance approach that will align your needs with theirs.