What is supply chain financing?
Supply chain finance improves payments between companies and their suppliers. Supply chain finance programs are a set of solutions that optimize a business’s cash flow while extending payment terms to their supplier. Additionally, it provides the option for SME and large suppliers to get early payments on invoices.
Supply chain financing provides advantages for the buyer and supplier. The buyer takes advantage of working capital, while the supplier generates more cash flow. The financing solutions are implemented in a couple of different ways: reverse factoring and supplier finance.
Large companies use reverse factoring as a post-delivery financing option to extend their payment terms without affecting their supply chain. Without using this method, suppliers would have to deal with the cash flow issues that follow slow payment terms. So, reverse factoring helps the supply chain by providing a way to finance slow-paying invoices.
Supplier finance is a pre-delivery financing option that allows a supplier to purchase raw materials or finished goods to meet purchase orders. Additionally, a supplier that expects an increase in orders and wants to stock inventory to fulfill those orders would use supplier financing.
How does supply chain finance work?
Reverse factoring and supplier financing work differently. Both are win-win situations for buyers and sellers.
This is the most common form of supply financing. A company using reverse factoring signs an agreement with a supply chain finance company. The supply chain finance company handles the accounts receivables so suppliers can get early payments on net-30 to net-60 approved invoices. The company handling the reverse factoring collects payment once the invoice matures.
What are the advantages of reverse factoring?