Supply chain finance, also known as reverse factoring, is a type of financial arrangement that provides short-term credit to optimize working capital for both buyers and suppliers. It involves a lender dealing with the buyer’s creditworthiness, reducing risk for the supplier. Suppliers sell their invoices, sales receivables, or debtors at a discount to banks or other financial providers, often called factors. Although they do not receive the total amount, suppliers get faster access to the money they are owed, while buyers get more time to pay and potentially negotiate better terms from the seller.
Supply chain finance requires the involvement of both the supplier and the customer. Up to 100% of the value of invoices can be funded once they have been approved by the customer, often at more competitive rates than would otherwise be available. The process is technology-based and links the three parties to a transaction. It can be accessed directly through larger organizations and many alternative providers.
There are several variations to supply chain finance transactions. One is the extension of the buyer’s accounts payable terms, which allows the buyer to delay payment to the supplier. Another is inventory finance, where the lender provides funding based on the value of the supplier’s inventory. Finally, payables discounting involves the supplier selling its accounts receivable to a lender at a discount to receive payment faster.
Supply chain finance can attract buyers and suppliers, providing faster access to capital at more favourable rates than traditional financing options. It can also improve relationships between buyers and suppliers. The financing relationship is purely between the supplier and the lender, and the buyer retains control over the administration of the sales ledger. However, it is essential to carefully consider the terms and fees associated with supply chain finance to ensure that it is the best option for your business.