What’s Provide Chain Finance?
Supply Chain Finance (SCF) has been defined by Investopedia as a set of technology-based business and financing processes that link the various parties in a transaction – the buyer, seller and financing institution – to lower financing costs and improve business efficiencies. SCF provides short-term credit that optimizes working capital for both the buyer and the seller. SCF generally involves the use of a technology platform in order to automate transactions and track the electronic invoice approval and settlement process from initiation to completion.
Supply Chain Finance is also known as supplier finance or reverse factoring, and is essentially a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. This results in a win-win situation for the buyer and supplier. The buyer optimizes working capital, and the supplier generates additional operating cash flow, thus minimizing risk across the supply chain.
A typical SCF extended payables transaction works as follows: Let’s say Company A buys goods from a supplier B. B supplies the goods and submits an invoice to A, which A approves for payment on standard credit terms of 30 days. If supplier B requires payment before the 30-day credit period, the supplier may request immediate payment (at a discount) for the approved invoice from Company A’s financial institution. The financial institution will remit the invoiced amount (less a discount for early payment) to supplier B. In view of the relationship between Company A and its financial institution, the latter may extend the payment period for a further 30 days. Company A therefore has obtained credit terms for 60 days, rather than the 30 days provided by supplier B, while B has received payment faster and at a lower cost than if it had used a traditional factoring agency.
