What is Supply Chain Finance?

When it comes to financing options, sometimes it’s best to take a big picture look at your entire supply chain to determine how far your dollar can go and how many cash flow issues you can solve with a single working capital solution. Supply chain financing offered by some international factoring companies is one means to those ends, with funding arrangements that optimize cash flow for your upstream and downstream partners. This financing method, when applied to the full supply chain, does not only improve the financial positions of both suppliers and buyers, but it also reduces risk that can crop up from production to sale of goods.

As a result, you can enjoy an efficient supply chain and improved relationships with the various parties along it, which comes in handy during both the good and the bad times for your business.

The Mechanics of Supply Chain Finance

No one wants a weak link in their supply chain because the effects will ripple from the raw materials supplier all the way up to the retailer, and vice versa. Full supply chain finance caters to the exporter’s cash flow needs through its factoring component, and trickles down to those of the supplier through what is known as reverse factoring.

Factoring is a type of financial transaction in which a business, such as an exporter, sells its invoices to a factoring company at a discount, and the factor, in turn, advances up to 90% of the value of the invoices upon shipping, on day 1, so the business doesn’t have to wait 30, 60, or 90 days to get paid. Once the invoice is paid upon invoice maturity by the buyer, the factor sends the remaining balance to its client.

Reverse factoring, or payables financing, follows a similar principal, but the role of the exporter, in this case, is switched. Here, the exporter functions in the capacity of buyer and, as the name suggests, finances its payables, thereby allowing it to extend the date when payment is due to its supplier.

Once invoices from the supplier are approved by the buyer, the supplier sells these receivables at a discount to a factor or other financial institution it works with and in turn receives early payment from them. The buyer then pays the factor upon invoice maturity.

Not Just a Receivables and Payables Game

In addition to receivables- and payables-based transactions, supply chain finance can also support facilities based on inventory.

For businesses dealing in goods that have a large and “liquid” market and that hold goods in reputable third-party warehouses, some international factoring companies like Tradewind Finance can arrange off-balance sheet financing against your standing inventory. This inventory financing is typically arranged with conditions on the advance rate and tenor of funding, and must include sound backup liquidation planning.

Creditworthiness is Key

Part of the success of supply chain finance is due to the credit checks that factors or other financial institutions conduct to ensure that the buyer, whether it be an exporter or retailer, is a creditworthy business with strong financials.

This due diligence safeguards against the risk of buyer insolvency and makes for smoother, more efficient, and sound transactions within the supply chain ecosystem.

Additional Benefits of Supply Chain Finance

Improved cash flow and greater access to working capital are reasons enough to consider supply chain financing for your business. The perks don’t end there though. This financing arrangement also simplifies paperwork as payment is made to one entity while dealing with multiple suppliers. Additionally, you can work with smaller suppliers and contract directly with them. This advantage opens you up to a broader range of suppliers.

But besides helping your own company achieve a better financial, operational and strategic position, your suppliers will also reap the benefits of this working capital solution.

And a happy supplier means a happy supply chain.

Through supply chain finance, your suppliers will receive early payment at a lower cost as you can leverage your off-balance sheet credit.  This early payment will optimize their cash flow and allow them to provide consistent supply and increase their volume of production. And when you’re looking to increase sales, your supplier’s ability to keep up with orders is imperative.

Like you, your suppliers will improve their financial health as they receive faster funding, high advance rates, and as trade debt is taken off their balance sheet. Using purchase order funding, inventory lending, letters of credit, and structured guarantees, supply chain financing is a win-win solution that aligns the needs of both buyers and suppliers, which can be the missing link to stronger sales for all.