Managing money flow is vital for companies to operate daily, grow, and stay in business. However, payments between suppliers and buyers can often be challenging, especially when margins are tight or payment cycles are long, creating cash flow issues. This is where Supply Chain Finance (SCF) comes in, which helps improve cash flow for both suppliers and buyers.
Continue reading to know about supply chain finance for small businesses in detail.
What is Supply Chain Finance?
Supply chain finance is a type of financing that optimises cash flow between suppliers and buyers. Typically, there is a gap between when a supplier gets paid and when the buyer makes money from the supplier's goods, which strains both parties. The reason is suppliers want to get paid faster, and buyers want to maintain a healthy cash flow. Supply chain finance helps connect these needs by involving a third-party financial company.
They pay the supplier upfront, which gives the supplier immediate cash flow relief. In exchange, the buyer commits to paying back the third party of the financial institution on a slightly longer timeline that works for their cash availability. This mechanism aligns payment capabilities between buyers and suppliers.
Types of Supply Chain Finance Programs
Here are some common types of supply chain finance programs:
1. Reverse Factoring
Reverse factoring allows a financial provider to pay suppliers on a buyer's behalf. The buyer pays the provider later under extended terms, giving suppliers early payment.
2. Dynamic Discounting
It means buyers pay suppliers early in exchange for a discounted amount. Suppliers receive faster compensation, while buyers get discounts.
3. Approved Payables Finance (APF)
Approved payables financing involves a financial institution funding the buyer directly. The buyer then uses this financing to pay suppliers on time. This optimises the buyer's capital while ensuring supplier payment.
4. Inventory Financing
It uses inventory value as collateral for financing. Businesses can free up capital locked in inventory for other needs.
5. Receivables Purchase
It means selling accounts receivable to a financial institution at a discount. It provides immediate cash flow to the seller, but the institution collects the payments.
6. Supply Chain Financing Platforms
It connects buyers, suppliers, and finance providers digitally. They automate transactions and provide real-time tracking and transparency.
Benefits of Supply Chain Finance
The importance of supply chain finance for businesses is:
1. Improved Liquidity
Supply chain finance mechanisms enhance available cash flow and access to working capital for both purchasing organizations and their suppliers. Buyers can negotiate longer payment terms with the financing institution, allowing them to deploy cash longer in their own operations.
On the other hand, suppliers receive early payment from the financier after fulfilling the order, resolving any cash flow crunches. This improves liquidity across the supply chain.
2. Lower Costs
The financing rates offered to suppliers through supply chain finance programs are usually lower than common alternatives like bank credit lines or loans. Rates are discounted due to the involvement of the anchor buyer, who provides security.
Thanks to confirmed purchase orders or invoices, suppliers also avoid collateral requirements. The optimised cost of capital reduces expenses for suppliers as they scale.
3. Optimised Inventory Levels
Supply chain finance improves visibility and predictability across procurement and fulfilment activities. Buyers can better anticipate demand changes based on market trends. On the other hand, suppliers have clarity on upcoming purchase orders. This enables companies to optimise inventory planning, reduce buffer stock, and adopt just-in-time approaches.
Less working capital is trapped in excess raw materials or finished goods, and improved inventory release funding for other capital projects.
4. Technology Integration
Modern supply chain finance solutions provide seamless integration between procurement, order management, logistics/transportation, and payment systems. Through integrated platforms, buyers, sellers, financiers, and logistics providers can seamlessly share data.
This connects the operational workflow. Purchasers can track order status and quality checks before the financier makes the payment. Suppliers can time deliveries based on payment dates. This coordination and end-to-end visibility enable responsive, efficient practices.
5. Risk Reduction
Early payment to suppliers enhances their financial stability and cash adequacy. This significantly reduces risks of shipment delays or defaults arising from suppliers' inability to mobilise working capital for key raw materials or logistics. It also minimises the chances of payment delays from buyers affecting supplier viability.
The improved resilience through SCF allows companies to pursue aggressive growth without being constrained by supply or credit risks. This is especially relevant for enterprises scaling internationally across emerging markets.
How Supply Chain Finance Works
Supply chain finance allows buyers to pay suppliers later while enabling suppliers to get paid early. First, the buyer sets up an agreement with a financing institution. Suppliers are invited to join the program. When suppliers invoice buyers for goods/services, they have the option to receive early payment by selling their receivables to the financer on the platform.
This way, buyers gain improved credit terms and suppliers faster access to capital without impacting the buyer-supplier relationship. Supply chain finance can be implemented globally through digital platforms that connect organizations and offer discounted early payment options. This mechanism benefits both buyers and suppliers.
Conclusion
Supply chain finance is seeing wider adoption due to its many cash flow and working capital benefits. It covers various techniques, from invoice factoring to inventory financing to payment terms, that help optimize financing across the supply chain.
Companies that leverage supply chain finance well are better equipped to operate smoothly, reduce costs, foster collaboration between parties, and support expansion plans. Implementing the right solutions can significantly improve organization's liquidity and resilience. As global supply chains continue to grow in complexity, paying closer attention to supply chain finance is becoming increasingly important.
