Supply Chain Finance

Supply Chain Finance

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Gary Hemming

Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in business loans

Supply chain finance is a financial tool that helps companies to manage cash flow. This type of finance can be used by, and benefit, both buyers and sellers.

Most importantly supply chain finance helps manage working capital for day to day business operations.

What is supply chain finance and how does it work?

Supply chain finance can also be known as reverse factoring and supplier finance. It is different from other trade finance in that it is a type of finance that can be used for business at both ends of the supply chain unlike, for example, export and import finance that are specifically tailored to buyers or sellers.

The main principle of supply chain finance involves early invoice payment to the supplier and this payment will be made by a finance company.

Much like other types of trade finance, such as import finance and export finance, any company that trades overseas can consider export financing.

The supply chain process

There are six steps involved in supply chain finance and these are:

1.            The business enters into an agreement to buys goods or services from a supplier

2.            The supplier then issues an invoice to the buyer. The invoice will contain payment terms and importantly will specify when payment is due.

3.            The buyer will approve the invoice and it will be uploaded to a supply chain finance platform.

4.            The supplier will then use this platform to seek early payment of the invoice.

5.            Lenders will be able to review the request and offer credit. If the supplier accepts the arrangement with the lender then payment will be made and the lender will charge a fee. The fee will be based on the credit rating of the buying business who will be paying the invoice.

6.            The final step in the arrangement is that the buyer will pay the finance company when the invoice is due according to the original payment terms set out by the seller.

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What are the pros and cons of supply chain finance?

Here are some of the key pros and cons of supply chain financing.

Advantages

One of the main benefits of supply chain finance is that it hedges the gap between purchase and payment for both parties. It is a mutually beneficial arrangement creating trust and a positive relationship.

This can also be a lower cost source of credit depending on the credit rating of the business buying goods.

In this arrangement trading can take place without the worry of default if a supplier went bust or something unexpected happened. Supply chain finance can help when negotiating terms of a deal if support is in place to ensure working capital is not tied up in one area, leaving the business free to carry on trading.

Disadvantages

The key disadvantage of supply chain finance is that there is a cost associated with it.

The second being the added complexity of dealing with your finance provider during what are already complex transactions. That said, modern lenders have simplified this process, making it fairly simple in most cases.

What’s the difference between trade finance and supply chain finance?

Trade finance is used by exporters and importers for specific trades, while supply chain finance looks at the entire supply chain and can be used by both parties in the same deal; often it is used by large corporations to manage supply chain performance keeping cash flow available.

Supply chain finance uses mechanisms such as reverse factoring, dynamic discounting, inventory financing and purchase order financing to provide support to businesses.

  • Reverse factoring: The buyer arranges for a financial provider to pay the supplier early, often at a lower financing cost due to the buyer’s creditworthiness.
  • Dynamic discounting: This is where buyers offer early payment to suppliers in exchange for a discount on the invoice.
  • Inventory financing, also known as warehouse financing: Provides short term funding based on the value of a company’s inventory or assets, helping businesses manage cash flow tied up in stock. This option is often used by smaller privately owned businesses that don’t have access to other lines of credit.

Purchase order (PO) financing: Financing provided based on purchase orders received, allowing suppliers to fulfil large orders without strain on working capital.

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Will I qualify for supply chain finance and can you help if I have bad credit?

Yes, we can help match you with providers, we seek to understand your business and the support package you need.

Whilst supply chain finance is usually used by businesses with good credit histories that have been trading for a few years, the ability to get finance depends on your industry and the other parties involved.

Supply chain finance is, however, less likely to be accessible to newer start-ups and businesses with a poor credit score, or those making smaller orders.

What are the costs?

Costs vary depending on the type of finance and credit rating of the parties involved.

If a supplier requests early payment of an invoice, a fee is deducted by the finance company, which is usually between 10% and 20%. The benefits of early payment always need to be weighed up in relation to costs.

What other options do I have to finance my business?

When you’re looking for working capital finance, there are numerous options available to fund your company and boost your cash flow. To simplify, these can be broken down into business loans, invoice finance, asset finance and business revolving credit facilities such as business overdrafts and credit cards.

Business loans are a simple way to borrow funds. They can be broken down into 2 main types, unsecured business loans and secured business loans. A key advantage is that fast business loans can be arranged quickly, often in as little as 24 hours, making them a great option for when funds are urgently needed.

Invoice finance allows you to release funds from the invoices that you have raised, but have not yet been paid. It is ideal for businesses that operate on delayed payment terms. As a financial product, it can be broken down into invoice factoring (also known as debt factoring) and invoice discounting. The key differences come down to who is responsible for credit control. Confidential invoice discounting allows you to borrow without alerting your customers.

Asset finance allows you to raise funds to purchase an asset, or to lease a required asset. It is also known as equipment finance as it is often used to fund new equipment for a business.

Frequently Asked Questions

Supply chain finance can be a helpful tool for businesses looking to trade overseas.

Given the range of options available and multiple parties involved it is recommended that you contact a specialist advisor with experience in arranging supply chain finance.

The funding process usually takes two to three weeks on average, depending on your circumstances.

We will support you through the process and have many years of experience working with a range of specialist brokers throughout the country to find the right match for our clients.

Yes, ABC finance works with multiple funders giving more flexibility and a range of options.

We have over twenty years of experience matching businesses with finance providers. Contact us for a callback so we can discuss your needs.

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