Supply chain finance

What is supply chain finance?

Supply chain finance refers to a range of financial arrangements that can be made between buyers, suppliers, and financial institutions to improve working capital and optimise cash flow within the supply chain. 

Given that many businesses rely on selling the inventory from suppliers to generate revenue to repay their invoices, supply chain finance allows suppliers to access early payment for their invoices, while buyers enjoy extended payment terms.

Suppliers can rely on it for financing, so they can keep producing and delivering goods. Buyers can also negotiate better terms with suppliers. Win-win right? Here we explore the various types of supply chain finance available, how it works and how it can benefit your business. 

What are the benefits of supply chain finance?

Correctly implemented, supply chain finance helps both suppliers and buyers improve their cash flow and manage their working capital.

1. Improved Cash Flow: SCF allows suppliers to receive early payment on invoices, improving their cash flow and enabling them to reinvest in their business, purchase raw materials, and manage operational expenses without delay.
2. Extended Payment Terms: Buyers can negotiate extended payment terms with suppliers, giving them more time to manage their own cash flow without negatively impacting their suppliers' financial health.
3. Reduced Financing Costs: By leveraging the buyer's creditworthiness, suppliers can access lower financing costs compared to traditional borrowing options. This results in significant savings and improved financial stability.
4. Strengthened Supplier Relationships: SCF fosters stronger relationships between buyers and suppliers by providing financial support and stability. This collaborative approach can lead to better terms, improved reliability, and a more resilient supply chain.

How does supply chain finance work?

Supply chain finance leverages the creditworthiness of the buyer, which is usually better than that of the supplier, enabling suppliers to access funds at a lower cost than they could on their own. 

Here’s how it works:

1. Supplier delivers goods/services: The supplier ships the goods or provides the services to the buyer and issues an invoice.
2. Invoice approval: The buyer approves the invoice and commits to paying it at a future date, typically in 30 to 90 days.
3. Finance request: The supplier requests early payment on the invoice from a third-party finance provider, such as through an invoice finance provider, or a short term loan through iwoca .
4. Early payment: The finance provider pays the supplier a percentage of the invoice value upfront (usually 90-100%), minus a small fee, or the buyer uses the loan to pay their invoice.
5. Buyer payment: If using invoice finance, the buyer pays the full invoice amount to the finance provider on the agreed-upon due date, usually once the inventory has been sold, or repays their loan.

This arrangement benefits both parties: suppliers get faster access to cash to manage their working capital needs, and buyers can negotiate better terms or simply manage their cash flow more effectively.

Supply chain finance example

To illustrate, let’s consider a practical example:

A small electronics manufacturer, TechGear Ltd, supplies components to a large consumer electronics company, Retail Corp.

1. Order and delivery: TechGear Ltd delivers an order worth £50,000 to Retail Corp and sends an invoice with 60-day payment terms.
2. Invoice approval: BigRetail Corp approves the invoice, agreeing to pay the £50,000 in 60 days.
3. Early payment request: TechGear Ltd, needing immediate cash flow to purchase raw materials for its next production cycle, requests early payment through an SCF programme.
4. Funds disbursed: A third-party lender, after confirming BigRetail Corp’s creditworthiness, advances 95% of the invoice value (£47,500) to TechGear Ltd, charging a small fee for the service.
5. Invoice settlement: On the 60th day, BigRetail Corp pays the full invoice amount (£50,000) to the lender, completing the transaction. The seller then receives the remainder of the invoice, minus the lenders fees and interest.

Benefits:

• TechGear Ltd: Receives most of the invoice amount immediately, improving its cash flow and enabling continuous production.
• BigRetail Corp: Enjoys extended payment terms without affecting its supplier’s financial health, potentially securing better pricing or terms and safeguarding their relationship.

Supply chain finance thus creates a mutually beneficial arrangement enhancing liquidity for suppliers while allowing them to manage when and how they pay their invoices.

What types of supply chain finance are there?

Supply chain finance encompasses several key components that ease its effective implementation. These components include:

Invoice financing

Invoice financing is when a financial institution pays suppliers early based on the buyer's creditworthiness. The value is that It enables suppliers to receive payment for their invoices before the agreed-upon payment terms. Suppliers get money right away. 

They can use it for expenses, growth, or cutting costs. Financial institutions offer financing options to help suppliers keep their cash flow healthy and the supply chain running smoothly.

Dynamic discounting 

Dynamic discounting is a flexible payment arrangement that benefits both buyers and suppliers. Suppliers offer early payment discounts to buyers, helping them manage their money better and increase cash flow. 

On the other hand, suppliers can receive early payment, ensuring a steady stream of cash and reducing their reliance on external financing. This collaborative approach fosters strong relationships between buyers and suppliers, leading to increased trust and efficiency within the supply chain.

Approved Payables Finance

In this arrangement, financial institutions provide funding directly to suppliers based on the approved invoices from the buyer.

Approved payables finance is a financing option that allows suppliers to get funding directly from financial institutions based on the invoices approved by the buyer. 

This arrangement provides suppliers with quick access to working capital, eliminating the need to wait for payment from the buyer. By leveraging the creditworthiness of the buyer, suppliers can secure financing at favourable rates, enabling them to meet their financial obligations and invest in their business growth.

Inventory Financing

Inventory financing is a form of asset-based lending that allows suppliers to use their inventory as collateral to secure financing. 

By pledging their inventory, suppliers can access working capital to cover operational expenses, invest in new products, or expand their production capabilities. This type of financing is particularly beneficial for suppliers with high inventory turnover, as it provides them with the necessary liquidity to manage their cash flow effectively.

What is the difference between trade finance and supply chain finance?

Trade finance focuses on facilitating international trade by providing tools like letters of credit and export credit to ensure payment and reduce risks in export-import transactions. It primarily involves banks, exporters, and importers. 

Supply chain finance, on the other hand, optimises liquidity within the entire supply chain, both domestically and internationally. It uses methods like reverse factoring and dynamic discounting to allow suppliers to receive early payment on approved invoices, leveraging the buyer's creditworthiness. 

While trade finance mitigates payment and delivery risks in international trade, supply chain finance improves cash flow and extends payment terms, benefiting both suppliers and buyers.

Finance your supply chain with a short term loan

If you need fast, flexible financing for your supply chain, our Flexi-plan offers flexible repayment terms and fast access to funds, borrowing from £3,000 to £500,000.

Here are a few reasons to choose our business expansion loans:

• Apply within minutes online and get approved within 24 hours.
• Borrow money for as little as a day and up to two years.
• No early repayment fees or collateral required.

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