A surefire post-shipment financing strategy is the backbone of any and every business conducting trade across borders. It can help reduce financing costs, manage unpredictable risks, and improve efficiency significantly for both buyers and sellers involved in the project. This is where supply chain financing proves to be a catalyst of growth.
Supply chain financing, also known as reverse factoring, is a term describing a set of advanced solutions that are designed to enable businesses to focus on more revenue-generating or growth-accelerating strategies. It helps them shift focus from managing mundane processes, allowing them to dedicate their resources and capital to take up more growth opportunities.
How Does It Work?
Supply chain finance is set up by the buyer. Once the terms have been agreed upon with the supplier, the supplier’s invoices are paid immediately by a bank or other agencies on behalf of the buyer. The banks or other financial institutions serve the role of a third-party responsible for providing short-term credit that optimizes working capital and provides liquidity to both parties.
Here, suppliers get paid immediately for the deliveries they have made. On the other hand, buyers get more time to clear the payments. Banks or financial institutions like NBFCs that offer supply chain finance solutions evaluate the buyer’s credit history instead of the supplier’s.
Buyers and sellers both benefit from supply chain finance. Sellers do not have to necessarily provide a detailed credit record to benefit from financing solutions, and buyers can negotiate better terms with the supplier such as extended payment schedules. Owing to a host of benefits, supply chain financing facilitates seamless and lasting collaboration between both parties. Let’s take a closer look at some of the key advantages.
Key Benefits of Supply Chain Finance
1. Optimized Cash Flow:
With supply chain finance, exporters can manage their cash flow more effectively. They can receive early payments on their invoices, helping them improve their cash flow. It can be particularly beneficial for businesses engaged in international trade, allowing them to be prepared for financial setbacks that may arise due to various factors like delayed payments, currency fluctuations, stringent regulations, or economical instability.
2. Quick Access To Capital:
By using supply chain financing, exporters can access working capital that they may not otherwise have been able to access. Businesses have to take care of multiple financial responsibilities to ensure smooth operations such as paying employees, settling monthly bills, investing in new inventory and tools, and such. This quick capital enables businesses to not only manage financial risks but also take on growth opportunities.
3. Lower Financing Fees:
Supply chain financing can often provide exporters with lower financing costs than traditional financing methods, such as bank loans or supplier-initiated factoring. This can help to reduce the overall cost of doing business and improve profitability.
4. Fewer Risks:
Supply chain financing can help reduce the risk of non-payment or late payment by the buyer. This is because the financing provider will usually assume the risk of non-payment, which can help provide exporters with greater financial security. In addition, importers can track the orders and the inventory levels to analyze the risks involved throughout the supply chain.
5. Flexible Payment Terms:
The main benefit for the buyers is improved flexibility in terms of payment clauses in the contract drafted with suppliers. Here, the supplier receives the payment immediately. As such, the buyer can negotiate longer payment cycles without disrupting their suppliers’ cash flow.
6. Streamlined Payment Processes:
International buyers often collaborate with suppliers belonging to diverse markets. With supply chain financing, a buyer can skip the hassles of managing the payments for all of their suppliers. Instead of paying each supplier individually, the buyer submits all payments to the third-party provider.
7. Improved Relations Among Buyers & Sellers:
Supply chain financing can help build trust among buyers and suppliers, helping both parties establish long-term relations in the market and thereby improve their network. It facilitates more favorable payment terms. With supply chain finance, importers can offer their suppliers the option of early payment on their invoices. The relationship between buyer and seller remains steady as it introduces a third-party finance provider that acts as an intermediary to ensure smooth payment processes.
Get Excellent Supply Chain Finance Solutions with Tradewind
With 20 years of unrivaled industry experience and highly-trained experts on board, Tradewind Finance can best finance your full supply chain. Being one of the leading supply chain finance providers, we use financing and risk mitigation techniques to optimize the management of working capital and liquidity in the supply chain.
Our global financing solutions are designed to serve the needs of both buyers and sellers and minimize risk across the supply chain. Using factoring, purchase order funding, inventory lending, letters of credit, structured guarantees, and other structured trade finance techniques, we can finance all the periods using:
1. Import Financing:
In combination with discounting your receivables, Tradewind can help you import/purchase an additional pre-sold product from your vendors, via a letter of credit or documentary sales terms. These arrangements are a particularly good fit for very high-growth or seasonal businesses.
2. Inventory Financing:
For clients dealing in goods that have a large and liquid market and holding goods in reputable third-party warehouses, Tradewind can arrange financing against the 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.
3. Vendor Financing:
For firms with solid financials and $500+ million in annual revenues, we can arrange vendor finance programs (also known as reverse factoring or payables financing). Often structured with ‘off-balance sheet’ treatment for our client, these arrangements offer our clients’ vendors greater liquidity at a lower interest cost, while offering longer payment terms to our clients.