Everything you need to know about supply chain finance
In the 21st century, supply chains stretch across the globe, connecting suppliers in different countries with multinational buyers. But, as supply chains get bigger and more intricate, enterprises find working with capital daunting. Totalling enormous figures and finding capital for business operations sometimes get trapped in the supply chain itself. When supply chains are so complex, how can one optimize their cash flow, and reduce the inherent risks associated with the global supply chain? Well, for all these potent problems, supply chain finance can be a potential solution. How? Let’s see! What is supply chain finance? Supply chain finance is a type of loan that can provide suppliers with working capital while ensuring the stability of the supply chain for buyers. In a nutshell, supply chain finance describes a situation when a buyer approves a supplier’s invoice for financing from a third-party intermediary so that the supplier gets paid more quickly than usual. Note that supply chain finance is
also referred to as reverse factoring at times, so supply chain finance and reverse factoring have the same basic concept. How does supply chain finance work? ● The buyer places the order with the supplier and the supplier sends an invoice to the buyer. ● The buyer approves the invoice and confirms whether the rounded-up amount will be enough to pay the financial institution. ● Post that suppliers sell the invoice to a financial institution for maturity and then the buyer pays the financial institution for the value of the invoice. The benefits of supply chain finance The sole motto of supply chain finance is to enable business owners in balancing their working capital needs with their suppliers. There are many benefits of supply chain finance. Some of these include the following: ● Enterprises can improve their capital position with supply chain finance. ● When business owners support their suppliers with affordable financing through supply chain finance they can reduce the risk of disruption to their supply chain. ● In addition, supply chain finance can also be used to strengthen supplier relationships and support business growth by keeping up with the demand. ● For suppliers also supply chain finance has working capital benefits. When suppliers take the advantage of early payment, they can reduce their DSO (Days sales outstanding), hence improving their working capital position. ● Also, unlike other forms of receivables financing, supply chain finance is primarily based on the credit rating of the buyers, so the cost of funding is lower for the suppliers. ● Suppliers can use supply chain finance for better cash flow forecasting and expand their business without any financial hiccups obstructing their way. Conclusion Supply chain finance can offer tremendous benefits to large organizations and cash-strapped suppliers during times of dire financial needs. However, before pursuing supply chain finance as a permanent funding strategy, in the long run,
business owners need to ask which supply chain finance models can support their broader cost strategies without any significant mishaps. Searching for supply chain finance providers? Find them with Broc Finance now!