Supply chain finance (SCF) is a set of tech-based solutions designed to improve efficiency for both buyers and sellers in a business transaction. It optimizes working capital for both parties, lowers costs, and protects the supply chain from disruptions.
The physical supply chain is the flow of goods and services from a supplier, to the manufacturer, to the retailer, to the customer. The financial supply chain works in the other direction, meaning the capital invested can be seen as risky—there are several stops along the way before the money makes its way back to the supplier. Corporations, therefore, are under pressure to unlock the working capital trapped in these supply chains.
In a regular business transaction, a buyer places an order for goods from a supplier. The goods are shipped, the supplier sends an invoice under their regular payment terms (typically 30-90 days). If the order is a substantial one, that’s a lot of working capital unavailable to the supplier for a considerable length of time.
To put this cash flow back to work, supply chain finance solutions come into play. A third party (a bank, or another finance provider), pays the invoice immediately. The buyer then pays the lender on more comfortable terms. This collaboration between buyers and sellers means everyone has working capital on hand for longer.
By purchasing suppliers’ receivables at a discount, the factor (the bank or other financier) is closing cash flow gaps for both parties, and strengthening their financial situations.
Reverse Factoring— another term for Supplier Financing/Supply Chain Financing is an extension of a buyer’s accounts payable—it is not classified as financial debt. For the supplier, it’s a true sale of their receivables. Large corporate buyers often have higher credit ratings, making finance cheaper and easier to access. Whilst trade payables and debt both mean money is owed to another party, trade payables are considered to be part of working capital, debt is a liability.
So, by harnessing supply chain finance, buyers maintain a healthy balance sheet. You are simply extending your payment terms. This is an important difference from traditional factoring: with supply chain finance, it’s the buyer initiating the financial transaction, not the seller. The buyers may be corporate clients, or any buyer familiar with receivables financing and various partnerships offered within the supply chain. It’s very much considered a win-win set-up, offering small businesses and others with risk mitigation while engaging trading partners and creating a value chain.
Dynamic discounting is, as it sounds, a variable discount applied to goods sold. The amount of the discount is tied to payment dates; the earlier the payment, the greater the discount. It is usually applied on an invoice per invoice basis, as a percentage discount on the face value of the invoice.
Like supply chain finance, dynamic discounting benefits both the buyer and supplier. The buyer’s capital is increased as the cost of goods sold (COGS) reduces, excess cash is put to work, and a solid working relationship is built with the supplier. The supplier gets paid promptly, their cash flow improves, and they’re able to invest in innovation and business growth. Different to supply chain finance, dynamic discounting is financed by the buyer. By strategically using both of these solutions in your business, you maximize working capital and drive growth.
Advances in financial technology are the catalyst for vastly improved invoicing, financing, dynamic discounting, and payment. Automated early payment software can combine supply chain finance and dynamic discounting in a single platform, and is suitable for even a small to medium business (with the ability to easily scale as you grow).
Fintech companies streamline your financial systems, integrating every step from the initial purchase order through to paying suppliers. The purchase order begins a cascade of processes, dynamic discounting and supply chain financing among them. As invoices are uploaded, the supplier is able to view approved invoices and make the call about whether it’s more beneficial to leave the terms as is and settle on the original date, or sell/trade the receivables to a funder in return for immediate payment.
The fintech company is like a broker, finding the most beneficial financing solutions for their clients. As technology continues to charge forward, we are likely to see fintechs embracing other supply chain services, further streamlining the process.
One fintech company that’s using an innovative approach to the challenges around supply chain finance is Resolve. Resolve is a complete B2B net terms and credit management solution that eliminates the ‘chain’ in supply chain finance.
Any B2B wholesale, manufacturing, or distribution company with US customers can engage Resolve. In the first step, Resolve conducts a quiet credit check on a potential customer. Without requiring any information from the customer, Resolve provides the business with reliable information about the credit limit and net terms (30, 60, or 90 days) to extend to the customer.
Once an invoice has been issued, Resolve pays the business up to 90% of the full amount of the invoice within one day. This immediately solves the business’ cash flow/working capital challenges, allowing them to pay their suppliers and cover overhead. The customer is able to pay their invoice using a branded payment platform, creating a seamless online financial connection between the business and each of its customers.
What was once restricted to the realm of traditional financial institutions is now becoming far more accessible as initiatives by fintechs create finance programs and solutions that improve onboarding, streamline accounts receivable, lower financing costs, and make access to new markets a possibility for companies who are ready to grow their businesses and become pandemic-resilient.
Trade finance, on the other hand, is the more traditional way of conducting business. It is a credit-based trade. There are letters of credit, bank guarantees, and a competitive dynamic where buyers attempt to delay payment while suppliers seek to be paid as soon as possible. This can be a good choice in the case of a new working relationship, where companies may not have done business together often, or at all.
As trade continues to expand globally, traditional financial services are being left behind in favor of open account trade. The supply chain is no longer a mainly bilateral arrangement - it is complex and involves multiple parties from all around the world.
A small to medium business in an emerging capital market, supplying goods to a large buyer in another part of the world, may not have the credit history or documentary evidence required to broker a traditional trade finance agreement. They also may lack the liquidity to wait several months for their goods to land before receiving payment.
Open account trade and supply chain financing gives these up-and-coming businesses an opportunity to break into new markets in a way trade finance just can’t. For the buyer, providing these supports to a supplier builds relationships and protects supply chain health. It’s not just a short-term solution—you can’t buy again from a great supplier if they’re insolvent.
Harnessing fintech solutions and optimization makes the complex web of global trade infinitely more manageable from small to large companies. Supply chains remain intact, cash flow gaps are no longer a catastrophic issue, and both the physical and financial supply chain flow smoothly while complying with regulators.
Traditional trade financing was perfect for the times when trade was often bilateral, and the companies you were doing business with were across town, or perhaps in the next state over. Supply chain finance platforms—and especially technology platforms—were unheard of because they weren’t needed.
As trade explodes globally, and global supply chains become the norm, we need to move away from traditional methods and adjust to this new reality; this means embracing the dynamic financing options available to us. This is how we will drive growth for everyone.