In a fast-growing world, accessible finance facilities like supply chain finance (SCF), also known as reverse factoring, adds mobility and smoothness in business transactions. It ensures a win-win situation for both the suppliers and buyers as they receive favorable benefits through this service.
For a better understanding, supply chain finance provides a solution that offers the suppliers early payment through a third-party involved (banking or non-banking financial institutions). In contrast, the buyers need to pay that third party back based on their payment terms.
However, there is a small processing fee that the suppliers are liable to pay to the third-party institution. Financial institutions cut it from the total payment made to the suppliers to avoid any kind of hassle. A good credit rating of the buyers can bring more opportunities for both parties than the credit rating of the suppliers.
So, this mainly means, being a seller, you can receive the money earlier than you were assigned to, providing your invoice. Banks or other financial institutions affiliated with the buyer’s company will pay you when you ask for it. On the other hand, if you are a buyer, there’s no need for you to put up with any headache of paying the supplier. You can ask for a flexible payment term from that financial institution while availing of this facility.
Suppose you are a supplier who has sold something to a company named X. Now, X has decided to pay you after 30 days, but you urgently need money. Unfortunately, X is unable to pay you in such a short time. You can ask for supply chain finance by submitting your invoice in this context. After X approves it, you will receive your money from the financial institution affiliated with X before the actual payment term at a discounted rate. X can negotiate with the financial institution and ask for more days to repay it.
There are mainly three ways to raise funds considering the recent trends in supply chain financing. You can deduct the number of receivables, reduce the count of inventories, or increase the supplies to raise funds.
Both parties enjoy numerous benefits while opting for such channel financing facilities for a quick solution to their finance-related problems. Here are some.
- Benefits received by the suppliers
- Early payment: Suppliers get early payments through supply chain financing. In other words, it rescues them when they are in dire need of money by paying them in advance.
- Improvement in cash flow: Supply chain financing ensures improved cash flow for the suppliers. It is a good sign for the growth of their business.
- Improvement in working capital: This facility helps the suppliers raise their working capital.
- Lower funding cost: As this channel financing depends more on the buyer’s credit rating, the supplier’s cost of funding gets lowered.
- Benefits received by the buyers
- Flexible payment option: It helps buyers by providing more time to pay the amount without making the relationship bitter with their suppliers.
- Advancement in working capital: Besides the sellers, buyers also experience improvement in their working capital.
Not only does supply chain finance play a significant role in withholding an amicable relationship between both parties, but it saves them from a more significant crisis and even helps in uplifting them to a better position. From large to small, every supplier can avail of this facility.