Introduction
The global supply chains are increasingly interlinked, with manufacturers sourcing materials from suppliers in various countries, with distributors handling fluctuations in consumer demand, and companies having to handle their working capital, procurement, and inventory amidst uncertain market conditions.
Against this backdrop, the concept of supply chain finance has emerged as a critical financial tool which helps improve the liquidity of the entire supply chain process without altering the nature of the commercial relationship between buyers and suppliers.
Unlike simple borrowing, supply chain finance focuses on optimizing the flow of money through the supply chain and when done well, can assist suppliers in getting their money early, while enabling buyers to pay on agreed payment terms that help them plan ahead.
With the continuing development of e-commerce and embedded finance services, supply chain finance is now increasingly being incorporated into procurement systems, ERP solutions, and digital business environments.
This guide highlights how supply chain finance works, types of supply chain finance models, how supply chain finance compares to alternative forms of financing, and what companies need to know before embarking on their own supply chain finance programs.
Why Cash Flow Matters Across the Entire Supply Chain
Each organization approaches its cash management needs in its own unique way.
The supplier would naturally prefer to be paid as soon as possible in order to finance manufacturing costs, buy material, and pay salaries.
The buyer would like to obtain as long a payment period as possible to preserve its cash resources.
Neither of these aspirations is unrealistic.
The problem comes into play when these two organizations have conflicting needs as regards their payment periods.
Without any kind of financing mechanism, the supplier might find itself liquidity challenged, while the buyer will face difficulties negotiating on its payment period.
That is where supply chain finance comes into play.
It tries to provide a solution that benefits several parties at once rather than only one organization.
What Is Supply Chain Finance?
Supply chain finance represents a number of financing mechanisms that can optimize the cash flow between the buyer and the supplier.
While the structure may differ by provider and market, supply chain finance usually includes the following parties:
- The buyer who acquires products or services
- The supplier who provides such products or services
- The financing provider who organizes payments
After commercial commitments are verified through the required procedure, the supplier can be provided with an early payment option, and at the same time, the buyer operates according to his/her commercial payment conditions.
It is necessary to note that the financing scheme depends on the chosen solution and commercial agreement.
Therefore, supply chain finance is not about changing the relationship with suppliers but about optimizing the finances of the whole chain.
Supply Chain Finance Is More Than Early Payment
Supply chain finance is perceived by many people as only revolving around the early payment of invoices.
Though early payment is indeed one of the crucial aspects of certain supply chain finance models, contemporary solutions have progressed beyond just financing invoices.
The current ecosystem for supply chain finance can include:
- Procurement financing
- Supplier financing
- Payables financing
- Dynamic discounting
- Inventory financing
- Purchase order financing
- Embedded finance experiences via digital procurement platforms
What matters is not just accelerating the payment process but achieving greater financial efficiencies in procurement, manufacturing, logistics, and business processes in general.
With increasing digitization of corporations, financing is slowly becoming a part of the regular business processes.
How Supply Chain Finance Creates Value for Buyers and Suppliers
Another factor contributing to the global expansion of supply chain finance lies in its ability to fulfill multiple business objectives at once.
Advantages for Buyers
On the part of buyers, supply chain finance could provide an additional tool for managing working capital.
Possible advantages include:
- Better coordination of payment timing with cash flow management
- Enhanced relations with suppliers
- Increased procurement flexibility
- More resilient supply chains
- Increased visibility due to digitized financing tools
Rather than considering finance as a separate treasury function, buyers are increasingly combining their financial and procurement strategies.
Advantages for Suppliers
Suppliers usually have more strict liquidity needs, especially SMEs.
Earlier availability of cash could contribute to:
- Stock replenishment
- Payroll management
- Continued production
- Business development
- Reduced stress due to receivables delays
For suppliers, the access to liquidity could increase their operational flexibility without affecting customer relations.
Supply Chain Finance Compared with Other Financing Solutions
A company can face different forms of financing when dealing with liquidity. Despite the similarity of financing solutions, these serve different commercial purposes.
Supply Chain Finance vs. Trade Finance
While trade financing is aimed at solving the problems that may arise when conducting domestic and foreign trade operations, supply chain financing is aimed at improving the liquidity after commercial transactions are conducted. Instead of facilitating the process of trade, it aims at making sure that cash flow is optimized in the course of the interaction of the buyer and the supplier.
Supply Chain Finance vs. Factoring
While in factoring a company’s invoices are sold to a financing company for the purpose of obtaining the advance payments, in supply chain finance there is usually a collaboration of three parties in the course of the agreement of the financing scheme.
Supply Chain Finance vs. Working Capital Financing
Working capital financing aims at helping businesses with handling the costs of everyday business operations like payroll, purchase of materials and goods from suppliers.
While supply chain finance is more of the process of cooperation, working capital financing aims at solving the problem of financing of a particular business entity.
Key Considerations Before Implementing a Supply Chain Finance Program
Implementation of supply chain finance requires consideration of factors other than choosing a finance partner.
There are various operational and financial factors to consider before implementing a finance program.
Supply Chain Structure
Firms that have different supplier networks might need financing models that can cater to different suppliers.
The type of relationship with suppliers will also determine if the program is suitable for meeting the overall procurement goals of the business.
Technology Readiness
Modern supply chain finance models tend to have integrated systems with procurement systems and enterprise systems.
The firm can determine if there is a need to use technology to automate certain steps in the process of financing.
Internal Collaboration
For effective implementation of the program, there should be cooperation between procurement, finance, treasury, legal, and technology departments of a company.
Collaboration allows companies to align their commercial and financial goals.
Supplier Involvement
Effectiveness of the program relies on supplier involvement.
The firm may see whether the financing methods suit the needs of the supplier.
Frequently asked questions
- Explain supply chain finance.
Supply chain finance is a term describing financing services aimed at optimizing cash flows between customers and suppliers. Depending on the particular type of financing, the supplier might get early payment while the customer still works under commercial payment terms. - How is trade finance different from supply chain finance?
While trade finance is used to facilitate trade transactions, supply chain finance is aimed at optimizing the liquidity in buyer-supplier relationships after creating commercial agreements. - Can small and medium-sized enterprises benefit from supply chain finance?
Yes, depending on the specific financing service provider, business model, and existing commercial relations, SMEs might become participants in supply chain finance programs. - Can supply chain finance substitute business loans?
No. Business loans and supply chain finance serve different purposes. Many businesses utilize both financing solutions and others. - How technology is changing supply chain finance?
Automation, embedded finance, digital platforms, APIs, and artificial intelligence are the trends which are transforming supply chain finance for businesses.
Conclusion
Related topics include cash flow management, working capital financing, embedded finance, business lending, and financial planning for SMEs.
Bettr is a fintech platform providing embedded finance infrastructure, digital lending technology, and financing solutions for businesses and financial institutions.
This article is intended for informational purposes only and does not constitute legal, financial, investment, or other professional advice, nor does it constitute a recommendation of any product or service. This article should not be regarded as constituting an offer or a solicitation to buy or sell any regulated or financial products or services. It has not been reviewed by any regulatory authority in any jurisdiction. Bettr makes no representations or warranties regarding the accuracy, completeness, or applicability of the content, and readers are encouraged to consult with legal, financial, or other professionals for advice tailored to their specific situation. Bettr does not guarantee the accuracy and completeness of this article and expressly disclaims any and all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance on this article.
