Supply Chain Finance: Everything You Should Know

SCF stands for Supply Chain Finance, which refers to a set of technology-based solutions aimed at lowering financing costs and increasing business efficiency for buyers and sellers involved in a sales transaction.

Supply chain finance, often known as “supplier finance” or “reverse factoring,” promotes buyers and sellers to work together.

This philosophically counteracts the usual competitive dynamic between these two sides. After all, in typical situations, purchasers try to postpone payment while sellers want to get paid as quickly as workable. Supply Chain Finance functions by automating transactions and tracking the approval and settlement of invoices from start to finish.

Buyers agree to approve their suppliers’ bills for financing by a lender, referred to as “factors” in this paradigm. This facility also benefits all participants by providing short-term credit that optimizes working capital and provides liquidity to both parties. Buyers get longer time to pay off their accounts, while suppliers get faster access to money they owe. The parties can use the cash on hand for additional projects to keep their respective operations running smoothly on either side of the equation.

Supply Chain Finance — Everything You Need To Know

When the buyer has a stronger credit rating than the seller, supply chain finance works best because the buyer can get cash or SME loan from a financial provider at a lower cost. This advantage allows buyers to bargain with sellers for better conditions, such as longer payment terms. Meanwhile, the seller can unload goods more swiftly in order to earn prompt money from the intermediate finance organization.

Supply Chain Finance as an Example

The following is an example of an extended payable transaction:

Assume that the vendor, Supplier XYZ, sells items to the customer, Company ABC. Supplier XYZ typically sends the items, then files an invoice to Company ABC, which approves the payment on conventional credit terms of 30 days. However, if Supplier XYZ desperately needs cash, she may request rapid payment from Company ABC’s linked financial institution at a reduced rate.

If this is allowed, the financial institution pays Supplier XYZ, and Company ABC’s payment time is extended for another 30 days, for a total credit term of 60 days, rather than the 30 days stipulated by Supplier XYZ.

With the need springing around, the usages surrounding the need for financing via cash or SME loan, Supply Chain Financing is a route that is helpful to businesses in the hour of need.

Supply chain financing has several advantages.

• Both buyers and suppliers benefit from supply chain finance since it helps both sides manage their cash flow.
• Suppliers benefit from invoice financing in the same way that they gain from invoice financing, wherein they are paid quickly rather than waiting for lengthy payment terms.
• Because supply chain funding is based on the buyer’s credit rating, the cost may be lower.
• Buyers can stretch their payment terms, delaying payment to suppliers for longer than usual, without directly pressurizing them.
• The lender’s working capital is affected, leaving both the buyer’s and supplier’s working capital available for other uses.

Supply chain financing is a collaborative effort in which the lender assists both the buyer and the supplier, and all three parties come to an agreement. That is why supply chain financing is not the same as invoice finance, although the two may appear to be identical from the supplier’s perspective. SCF has emerged as a lucrative option for business institutions in need.

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