Supply Chain Financing is a method to optimize cash flow, by allowing suppliers to get early payments on their invoices and giving the buyers an option of extending their payment period, thus increasing business efficiency and reducing financial costs.
From the start until the very end of an SCF agreement, several factors such as automated transactions, invoice monitoring, and payment terms are taken well care of. Buyers agree to accept their suppliers' invoices for financing by a bank or some other third-party lender, referred to as "factors" in the industry. SCF helps by supplying both parties with a short-term loan that optimizes working capital and provides liquidity.
Supply chain financing works best when the buyer has a better credit rating than the seller and, as a result, can obtain capital at a lower cost from a bank or from some other financial institution.
Let's take a look at how a supply chain cycle looks like:
1. A certain amount of goods or services are purchased from the seller
2. An invoice is issued to the buyer, with a specific payment period mentioned( could be 30 days,45, or 60 days, any time period)
3. The invoice is approved by the buyer and the supplier requests for early payment.
4. The funder(bank or any other financial institution) sends a small fee to the supplier, with a small deducted fee.
5. Funder gets paid by the buyer on the invoice due date.
5. Advantages for Buyers:
- Optimized working capital Many companies/ buyers make use of a supply chain finance arrangement to improve their working capital position, and to smoothen supplier-buyer relationships.
- Better supply chains in the future With proper regulation, the companies/buyers can reduce the possibilities of disruption in supply chains in the future.
- Stronger supplier-buyer relationships Buyers can improve their relationships with suppliers by giving them low-cost funding, thus ensuring a long-term partnership.
- Improved cash forecasting accuracy Suppliers who use supply chain financing may obtain more clarity about the time of receiving payments, making it simpler to precisely anticipate their future cash flows.
Supply chain finance is a great way to liberate cash flow and is advantageous to both buyers and sellers. With a steady cash flow management system like this, buyers and sellers can look to unlock more businesses, without having to worry about their finances.