Supply chain finance plays a crucial role in the success of businesses in the UK. It involves various financial techniques and solutions that help optimise the movement of goods and funds along the supply chain. By understanding the basics of supply chain finance, businesses can unlock potential opportunities and drive growth in the competitive market.

We discuss the benefits for buyers and suppliers, how it works, and the different types of supplier chain finance available.

What is supply chain finance?

Supply chain finance covers a range of funding solutions that help businesses turn unpaid invoices and pending payments into available cash. It’s often used by suppliers who want to get paid sooner, and by buyers who want to hold onto their cash a little longer without straining supplier relationships.

Sometimes referred to as reverse factoring, supply chain finance is typically set up by the buyer. Once a supplier sends an invoice and it’s approved, a finance provider steps in to pay the supplier early, usually within a few days. The buyer then pays the finance provider on the original due date.

Unlike traditional invoice finance, this approach is based on the buyer’s credit rating, not the supplier’s. That means the supplier often gets better rates and faster access to working capital. And for the buyer, it’s a way to keep suppliers happy while improving their cash flow.

How does supply chain finance differ from reverse factoring?

Reverse factoring can be viewed as a subset of supply chain finance. It involves buyers initiating early payment to a supplier via a third-party financial institution, arranging an agreement at better rates due to the buyer’s creditworthiness. 

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

Trade finance is used to support the exporting and importing of goods internationally, helping buyers fund the purchase of goods and ease financial pressure and cash flow during the process. Meanwhile, supply chain finance enables suppliers to get paid earlier once an invoice is issued and approved. They serve different points in the transaction cycle.

Sometimes confused with trade credit, trade finance can involve components such as letters of credit, bank guarantees and purchase order finance. Supply chain finance, in contrast, kicks in after the goods or services have been delivered.

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‍What are the benefits of supply chain finance?

Supply chain finance offers value to both buyers and suppliers. Used properly, it's a collaborative tool that supports cash flow, strengthens relationships and helps businesses keep finances healthy even when trading conditions are unpredictable.

Supply chain finance benefits for buyers

Buyers use supply chain finance to hold onto their cash for longer without delaying supplier payments. It improves their available working capital and helps keep supply chains strong and reliable.

• Extended payment terms: Buyers can negotiate longer terms without delaying payment to their suppliers, freeing up working capital for other priorities.
• More resilient supply chains: Early payments can prevent disruptions by supporting suppliers’ finances, especially during seasonal peaks or downturns.
• Stronger supplier relationships: Offering access to early payment helps build trust and loyalty, giving buyers more leverage when negotiating prices or service levels.
  

Supply chain finance benefits for suppliers

Supply chain finance gives suppliers faster access to cash, often at a lower cost than traditional borrowing, because it's based on the buyer’s credit strength, not theirs.

• Faster payments: Suppliers can unlock invoice value soon after it’s approved, often within days, without waiting 30, 60 or even 90 days to be paid.
• Lower cost funding: Since the financing is based on the buyer’s credit history and credit score, the cost is usually lower than other short-term loans.
• Improved forecasting: Knowing exactly when cash will land makes it easier to manage working capital and plan for growth.
  

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:

Imagine a supplier sells £50,000 worth of goods to a large retail chain. Under standard terms, they’d have to wait 60 days to be paid. That’s a long time to go without cash, especially if they need to restock or pay staff in the meantime.

With supply chain finance, once the buyer approves the invoice, the supplier can request early payment through the scheme. A finance provider pays the supplier most of the invoice upfront, minus a small fee. On the original due date, the buyer pays the finance provider the full amount.

The supplier gets the cash they need to keep trading. The buyer holds onto funds longer without harming the supplier relationship. And the finance provider earns a fee for facilitating the process.

This type of win-win model is particularly useful when buyers have stronger credit ratings than their suppliers, which is common in many supply chains.

How is blockchain enhancing supply chain finance

Blockchain is helping to enhance modern supply chains by introducing real-time tracking capabilities for goods and transactions, increasing visibility, reducing fraud and improving trust amongst the key players.

Supply chain finance can use verified blockchain data to enable faster and more seamless financing solutions. This helps to build supplier trust and strengthen the overall supply chain, as the aim is to prevent bottlenecks and meet increasing demand.

‍What types of supply chain finance are there?

Supply chain finance encompasses several key components that ease its effective implementation. The main types of supply chain finance are:

• Invoice financing
• Dynamic discounting
• Approved payables finance
• Inventory financing

Let’s take a look at each in more detail below:

Invoice financing

A popular option for businesses, invoice financing in supply chain finance involves a financial institution paying suppliers early to unlock the value from upcoming invoice payments before the agreed-upon schedule. Suppliers get money right away to prevent cash flow issues and operational bottlenecks. 

They can use it for expenses, growth, or cutting costs. Providers offer financing options in this context to keep the supply chain running smoothly.

Dynamic discounting 

This 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. Dynamic discounting is a collaborative approach that fosters strong relationships between buyers and suppliers, leading to increased trust and efficiency within the supply chain.

Approved payables finance

Related to accounts payable finance, this arrangement provides funds directly to suppliers based on approved accounts payable and invoices from buyers. 

This finance option 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 business growth.

Inventory financing

This 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.

Inventory financing is particularly beneficial for suppliers with high inventory turnover, as it provides them with the necessary liquidity to manage their cash flow effectively.

‍How does supply chain finance compare with other financing options?

Supply chain finance is distinct among business funding tools. It’s not a loan in the traditional sense, and it doesn’t require suppliers to give up control of their invoices. Instead, it allows suppliers to access early payment, based on their buyer’s creditworthiness.

Here’s how it stacks up against other common funding methods:

Business loans‍

A business loan provides a lump sum upfront, which can be used for any purpose. You repay it over time with interest. While flexible, loans rely on your own credit profile and often involve application processes, affordability checks and sometimes security.

Trade credit

One of the most common forms of financing within the supply chain is using trade credit solutions. This is essentially a line of credit offered by suppliers to the buyer to defer payments for goods and materials, and spread costs over an agreed period and number of instalments. Unlike supply chain finance, trade finance focuses on funding the purchase and not accelerating the payment for already delivered goods or services.

Equipment finance‍

Asset and equipment finance helps businesses buy or lease machinery, vehicles or technology, where the assets often act as security. There are various types of agreement, from hire purchases to finance leases, and they’re ideal for purchasing, hiring or upgrading key equipment without a big upfront outlay.

Invoice finance‍

While used in the supplier-buyer relationship, invoice finance comes in various forms, depending on whether or not you want to retain discretion and control over the process. Invoice finance providers offer an advance of a large percentage of pending client/buyer payments to ensure fast access to the majority of the funds to use right away, with the rest released, minus fees, once payment has been collected.  

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‍How do you implement supply chain financing?

To implement supply chain finance, a business first needs to partner with a finance provider that offers this service, which could be directly or through a third-party platform. From there, the process is designed to be quick and easy for both buyers and suppliers.

Here’s how implementation typically works:

1. Set up the programme: The buyer agrees to the terms with a supply chain finance provider. This could be a bank or a specialist fintech platform. They’ll agree on payment terms, systems integration and supplier onboarding.
2. Onboard suppliers: The buyer invites suppliers to join the scheme. This is usually optional, but many suppliers sign up if it means quicker payments.
3. Integrate with payment systems: Invoices are approved and uploaded to the platform. Some providers offer plug-ins for accounting software or ERP systems to streamline this.
4. Apply for early payments: Once an invoice is approved, the supplier can request early payment. The finance provider pays them, deducting a small fee. The buyer pays the full invoice value later, on the original due date.

Strong supplier communication and clear onboarding processes are essential for a successful rollout. It also helps if your chosen provider understands your sector and can support multi-supplier arrangements.

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‍Finance your supply chain with a flexible business loan

If you need fast, flexible financing for your supply chain, our Flexi-Loans offer fast access to funds, flexible repayment terms aligned with your cash flow and borrowing amounts from £1,000 to £1,000,000.

Here are a few reasons to choose our flexible business loans to support your supply chain financing needs:

• Apply within minutes online and get approval decisions within 24 hours.
• Borrow money for as little as a day and up to 60 months, and enjoy manageable repayments 
• Only pay interest on funds you draw down (with the option to top-up limits, subject to approval).‍
• No early repayment fees or collateral required.
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