Supply Chain Finance: A Way to Strengthen Your Supply Chain If you have a problem with supplier early payment before the deadline, you may lose one or more authentic suppliers. This is not expected in any business especially when the supplier is trustworthy or working with you for a long time. Not paying the suppliers if they send a special request to you may damage your reputation as well. This is where you may need the professional assistance of supply chain finance. This reduces any kind of disturbance in the supply chain and helps both - you as a buyer and your suppliers to enhance your respective working capitals. This concept is also known as reverse factoring. A different concept with unique features Though supply chain finance is called reverse factoring, it is quite different technically from the concept of factoring:
It is arranged and determined by the buyer not the seller Supplier obtains the finance at a funding cost as per anchor- buyer credit rating, not their credit rating In this system of funding “dynamic discounting” is also available when the supplier gets the requisite funding in advance against an agreed discount.
The Supply Chain Finance Process
The process is straight forward and if you can access a prominent player in this genre business will be easy and optimistic. Supply Chain Finance works in the following way: Step 1: As a buyer, you purchase a product from a supplier. Step 2: Supplier issues an invoice with a fixed deadline of 15 days or 30 days. Step 3: You approve the invoice and the deadline for payment. Step 4: When the supplier asks for early payment requesting you, not to wait until the agreed due date. Step 5: You are not ready for this but the supplier is important to you, so you contact a funder for the same. Step 6: The funder agrees to pay the amount due to the supplier or any part of it against a small fee. Step 7: You refund the amount to the funder on the agreed due date.
Benefits of Supply Chain Finance Both buyer and supplier are benefitted through this system:
A supplier can optimize their working capital by receiving the outstanding amount much before the deadline. A buyer can also strengthen their working capital that may not be possible if the suppliers demand the invoice amount before the deadlines. This kind of funding is a lower cost funding compared to the other funding options. A supplier can maintain the required cash flow or at least make a precise projection of cash flow in the short term which their business keeps moving. It helps to maintain a healthy relationship with the suppliers in the long run.