What is Supply Chain Finance?

From maintaining good health to cooking tasty dishes, there’s usually a harmony of parts involved in achieving the desired goal. The same rule applies to running a successful business. When the parts of a supply chain are acting in unison, a business can operate smoothly and consider bigger plans for growth and expansion.

But just like one thing askew can upset a health plan or spoil a recipe, supply chains can also suffer when changes to one part, whether it be a retailer or vendor, rattle the rest. There are ways to offset disruptions to supply chains, and the cash flow challenges that can ensue. One such resource to protect businesses and their supply partners is utilizing a supply chain finance company to optimize working capital.

With fluctuations in demand, shifts in consumer preference, new trading norms, and unprecedented events like the coronavirus pandemic, supply chains are constantly adapting to what their industry presents them with. This could mean extended payment terms with buyers or negotiating contracts based on what suppliers call for. New trends like eco-friendly production, not to mention the relocation of factories, require adjusting to a different way of doing things as well.

Supply chain financing, also known as reverse factoring, can ease the pressure on supply chains, whether they are faced with obstacles or periods of transition, by improving cash flow for both buyers and suppliers. This type of financing is based on receivables, payables, and inventory, and provides early funding to suppliers that is arranged by a financial intermediary. Under this funding program, buyers, in turn, can enjoy longer payment terms. The result is a greater availability of working capital for all parties along the value chain.

This funding method can be touted too for its organized structure. It allows a buyer to submit payments for multiple suppliers to a single entity, creating a streamlined payment process with simplified paperwork.

Suppliers, on their end, receive early payment at a lower cost as buyers take advantage of their off-balance sheet credit. With accelerated funding, they can provide a consistent stream of goods – and even boost their volumes of production. Trade debt is also taken off the supplier’s balance sheet, which puts them in a better financial position. Suppliers who may have had trouble securing funding from banks can rest assured that supply chain financing provided by a trade finance company is based on their buyer’s creditworthiness, not their own financials.

Additionally, not only does supply chain financing align the needs of both suppliers and buyers from a financial standpoint, but it also minimizes trade risk through credit protection offered by some trade finance companies.

Keeping transactions agreeable for your business and sourcing partners is nothing short of a balancing act. With a supply chain financing program that supports both ends of the transaction, all can operate efficiently and even achieve growth.