Unlocking Working Capital with Supply Chain Finance

Supply chain finance is a game-changer for businesses, allowing them to access much-needed working capital without taking on additional debt. According to a study, 75% of companies have seen an improvement in their cash flow since implementing supply chain finance.

By leveraging supplier financing, businesses can free up cash that would otherwise be tied up in inventory and accounts payable. This can be especially helpful for companies with long payment terms, such as 60 or 90 days.

In fact, a survey found that 60% of suppliers are willing to offer financing to their customers, providing a valuable source of working capital.

Supply chain finance is a game-changer for both buyers and suppliers. It helps both parties stabilize their cash flow by providing suppliers with access to accelerated payments on open invoices, allowing them to improve their cash flow and working capital.

Suppliers get paid within a few days rather than waiting for extended payment terms, which is similar to invoice financing. Supply chain funding is based on the buyer's credit rating, making it a lower-cost option for suppliers.

Buyers can extend their payment terms without directly putting pressure on their suppliers, as the lender's working capital is affected. This collaborative process helps all three parties involved – the buyer, supplier, and lender – work together to achieve their financial goals.

Here are some key benefits of supply chain finance:

Supply chain finance can also help reduce the likelihood of future disruption in the supply chain, as suppliers are less likely to go out of business due to cash flow issues. By offering suppliers easy access to supply chain finance, buyers can reduce the risk inherent in global networks and facilitate spend management.

Supply chain finance works by bridging the gap between buyers and sellers through a mutual collaboration. Traditionally, buyers try to delay payment, while sellers want to speed it up, but SCF changes this dynamic.

Buyers with better credit ratings can source capital at a lower cost and negotiate better terms from sellers, such as extended payment schedules. Sellers can then unload product faster and receive immediate payment from a third-party financing body.

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In an SCF program, buyers invite suppliers to join, and suppliers can log in to view approved invoices and choose which ones to receive early payment. Suppliers pay a financing or transaction fee and receive the money in their account.

The typical SCF process involves several steps, including selecting suppliers, posting invoices to an SCF system, and releasing payment to suppliers. Buyers pay back lenders at a later date and pay suppliers directly by the due date for any invoices not paid early.

Here's an overview of the SCF process:

By joining an SCF program, suppliers can benefit from improved financial stability, reduced risk, and timely payments. This can lead to stronger supplier relationships and better ESG performance.

Supply chain finance offers several key features and options that can benefit both buyers and suppliers.

One of the main benefits is that suppliers can get finance against a strong credit rating with a lower implied cost of funding. This can lead to improved cash flow forecasting and flexibility. Suppliers can also get additional working capital for production and raw materials.

Buyers can benefit from extended payment terms without negatively impacting their suppliers. This can be achieved through payment terms extension programs that minimize the impact on suppliers. Buyers can also collaborate with finance providers to facilitate early payment to suppliers.

A breakdown of the supply chain funding process shows that suppliers get paid within a few days, rather than waiting for the expected payment due date. This can be up to 120 days. The process involves the supplier issuing an invoice, the buyer confirming approval for payment, and the supplier getting the value straight away.

Some of the key options include:

Supply chain finance is a game-changer for both buyers and suppliers.

Buyers can improve their relationship with suppliers by providing them with access to low-cost funding, which puts them in a stronger negotiating position.

This can make the buyer a well-regarded and more important customer, with early inventory notice and first priority.

Supply chain finance gives buyers greater negotiating power, allowing them to negotiate bigger discounts and better prices on larger orders.

Buyers can also use SCF to get faster shipping times for the same price, which is a huge advantage in today's fast-paced business world.

By providing suppliers with access to low-cost funding, buyers can help them manage their cash flow more easily and reduce the costs of receivables management.

Suppliers benefit from access to extra capital without having to extend their own line of credit, and they can also benefit from a buyer's credit rating over their own.

This means they can access better interest rates on trade discounts than they would if they went directly to a factoring company.

In addition, suppliers can choose which invoices they want to receive cash for, and the others will be paid at due date, giving them more control over their finances.

SCF also gives suppliers a greater level of certainty over the timing of incoming payments, making it easier for them to accurately forecast future cash flows.

This is a huge advantage for small companies, which often struggle with cash flow management.

By participating in the reverse factoring process, both buyers and suppliers can benefit from a more durable business relationship, which is a win-win for everyone involved.

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The global supply chain finance market is a rapidly growing industry, with a total worldwide market for receivables management estimated at US$1.3 trillion. This market has grown by 35% in volume in 2020 compared to 2019, reaching US$1,311 billion.

The amount of funds in use as at the end of 2020 was estimated at US$505 billion, an increase of 42%. This growth is driven by the need for companies to improve cash flow and reduce the pressure on their overseas suppliers.

The global supply chain finance market is expected to continue to expand at a rate of approximately 20-30% per annum, with the highest growth originating from the US and Western Europe. Asian countries, India and China in particular, are considered the markets with most potential in the coming years.

The driving forces behind the rapid growth of supply chain finance programs are globalisation, which has increased the risk in supply chains and the impact on the financials of corporations, and working capital management, which has risen to the top of the Chief Finance Officers' and Treasurers' agendas.

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Here are some key statistics on the global supply chain finance market: