What is Supply Chain Finance?
Supply Chain Finance is a form of Working Capital finance which falls under the Trade Finance umbrella, often referred to as ‘reverse factoring’.
Global supply chains often have their challenges due to a diverse range of businesses that operate within, such as multinational buyers and suppliers, in various countries all operating together with varied working capital reserves. Thus, there is significant pressure on certain businesses to unlock working capital early which is stuck within their supply chains. Supply Chain Finance is a solution that optimises a business’s cashflow by advancing finance to the businesses suppliers, freeing up the much needed working capital to enable the business to thrive and trade efficiently. This type of finance is often used by business that experience seasonal trading and have to purchase large quantities of stock at a certain time of the year, rather than purchasing stock in more stable amounts throughout the year.
Supply Chain Finance vs. Invoice Finance
Under the Trade Finance Umbrella, the most common products are Invoice Finance and Supply Chain Finance.
The finance solution required often depends on whether the business is a supplier looking to unlock working capital from outstanding invoices due to orders from buyers (which would necessitate Invoice Finance), or whether the business is a buyer looking to accelerate payments to suppliers without tying up their own working capital.
When the business is the buyer, the finance provider will fund the payment to the supplier early, allowing the buyer to receive their goods quickly. Supply Chain Finance providers are looking at the strength of the buyer during a credit assessment, rather than the creditworthiness of the supplier.
Consequently, these finance providers allow the business to pay for goods faster, by advancing supplier payments on behalf of the business, giving the business a longer window to pay. This frees up working capital and provides the business with an opportunity to accelerate trading.
What are the key features of Supply Chain Finance:
- The Facility isn’t a Loan: The finance is advanced based on a specific purchase of goods which don’t carry fixed monthly payments, it is rather a given date that the funds have to be repaid to the lender.
- Payment Terms: The most common payment window is 90 days to repay funds the lender has advanced to the supplier. However other finance providers might allow up to 150 days depending on the nature of the business, with some unique lenders offering more of a revolving credit facility but only for supplier payments that is reviewed regularly.
- Credit Insurance: Finance providers look to obtain credit insurance against the business that is looking to take the finance rather than insurance against the supplier. This forms the security for the lender in the case of non-payment, rather than taking security over an invoice or a fixed asset. Meaning the credit limit set by the lender is typically bound by the credit insurance limit.
- Compatible: Supply chain finance products can be easily used in-conjunction with other types of finance such as business loans, asset finance, revolving credit facilities etc.
- Fixed Rates: The finance provider will provide a fixed monthly interest rate per 30 days. Thus, if the business wants to clear the finance within 60 days out of the 90 day payment window they will only pay two months of interest vice versa.
What are the benefits of Supply Chain Finance?
- Better Supplier Relationships and Increase Purchasing Power: As this type of finance accelerates supplier payments, the buyer is generally able to negotiate better prices and volume discounts for the goods they are purchasing from the supplier, thus creating a better working relationship between the two parties.
- Increased Working Capital Reserves: The business benefits from utilising the lenders funds for supplier payments, as they can extend the amount of time the business has to pay. Significantly increasing working capital available within the business which in turn can be utilised in other areas of the business such as marketing or product development.
- Flexibility: Normally supply chain finance providers will allow for the business to make multiple payments with their approved credit limit, as well as paying suppliers in several countries and multiple currencies.
- Reduced Supply Chain Risk: It is a well known fact that there are risks involved with international trade, using supply chain finance allows the business to reduce the risk within their supply chain. Most finance providers will also offer Foreign Exchange services alongside their supply chain offering, most of the time via a platform which offers end-to-end visibility with a dedicated account manager.
What are the disadvantages of Supply Chain Finance?
- Insurance Limits: As the funding amount is dictated by the amount of credit insurance the lender can obtain this might not be enough for all businesses, the business might have to consider looking at other business finance options to get to their desired funding amount.
- Barriers to Application: On average more established businesses have greater success in obtaining supply chain finance as with more trading history comes increased creditworthiness. Typically these finance providers have higher minimum criteria’s for applying businesses, meaning smaller or younger businesses might miss out on the opportunity to apply as they might not meet the minimum criteria.
How to Apply for Supply Chain Finance:
You will need:
- Last 2 years of Full Accounts
- Up to date management accounts
- Aged Debtor report
- Aged Creditor Report
- 3 months of business bank statements
- Summary of the businesses Supply Chain cycle
Provide can support your Supply Chain Finance application, finding you the best funding options for your business. We can help you navigate barriers to the application and obtain the best rates possible.