Supply Chain Finance

23-February-2024 16:09
in Commercial
by Sam Hodgson
Supply Chain Finance

Managing cashflow is an important aspect for any business, but it is rare that you truly consider your supplier’s cashflow - after all, someone else’s business is their business, right?

This approach can be somewhat shortsighted, however. Making an assumption that they’re in a better financial position than they truly are can mean we put unnecessary strain on them, leading to a poorer working relationship and potentially a lower standard of service or product.

Table of Contents

How Does Supply Chain Finance Work?
The Pros and Cons of Supply Chain Finance
The Difference Between Supply Chain Finance and Invoice Finance
How to Get Supply Chain Finance 

How Does Supply Chain Finance Work?

Supply chain finance is a product whereby a finance company facilitates the early payment of an invoice by lending that money to the buyer.

Typically set up as a revolving line of credit facility for the buyer, it can be used to keep you in exceptional standing with multiple suppliers, greatly improving your business relationships.

The system is simple. Once an invoice has been issued, it can be immediately presented to the supply chain finance company who will pay the invoice, minus their fee.

The buyer is free to pay the full invoice amount to the finance company as the standard invoice payment terms dictate.

Interested in securing supply chain finance, or any other type of business finance? Book in with one of our expert brokers for a no-obligation chat about your options.

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Supply Chain Finance

The Pros and Cons of Supply Chain Finance

PRO 1: The Speed

Getting your invoices paid early can be essential for companies looking to reduce pressure on their cashflow. Rather than waiting 30 days or longer for the cash to become available, it can be cleared within a day of the invoice being issued.

PRO 2: The Relationship

Supply chain finance is typically offered by the buyer to the supplier as an option. There is no obligation for its use, so the supplier can choose to opt in or out as they see fit.

Being able to provide this rapid payment option only improves the supplier/customer relationship, showing understanding and a willingness to help.

PRO 3: The Credit Responsibility

For the supplier, one huge pro is that the onus of the loan is on the buyer, not the supplier.

Any credit checks or other obligations fall on the buyer meaning it is available to suppliers who may be suffering from poor business credit history or other issues that prevent them from obtaining their own financial support.

PRO 4: Linking the Chain

Often, suppliers are part of an ongoing chain of supplier-buyer, meaning they have financial responsibilities to cover. Offering supply chain finance ensures that they remain a stable and flexible part of that chain, and not a potential block in financial throughput.

Supply Chain Finance

PRO 5: Negotiation Strength

Buyers who are willing and able to offer supply chain finance often find they have a stronger negotiating position with their suppliers and may be able to secure more beneficial deals thanks to the inclusion of this financial support.

PRO 6: Administration

Buyers with an ongoing supply chain finance arrangement are able to easily administrate multiple suppliers with a single centralised finance system.

CON 1: The Fee

Like any financial product, supply chain finance does incur a charge. Typically, this is between 10% and 20% of the invoice total.

As the supplier is the company benefitting the greatest from the arrangement, it is they who are responsible for accepting the cost of the fee.

CON 2: Invoice Limits

Supply chain finance is set up with credit limits and may not be flexible with late changes to the invoice totals.

CON 3: System Integration

Efficient supply chain finance requires IT system integration with the buyer, which can lead to administrative difficulties, especially in the early days of set-up.

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Supply Chain Finance

The Difference Between Supply Chain Finance and Invoice Finance

Supply chain finance is sometimes called “reverse factoring”, as it is a clear mirror to invoice factoring, one of the forms of invoice finance.

With invoice factoring, suppliers can sell their outstanding invoices to a factoring company to facilitate early payment in a similar way. The difference with supply chain finance comes with the business making the credit application and holding the responsibility for it. With invoice factoring, the responsible business is the supplier, while with supply chain finance, the responsible business is the buyer.

Similarly, invoice factoring offers a similar solution for buyers who may be under more financial strain, where the supplier is able to show more financial liquidity.

Read some of these related guides for more information on invoice factoring, factoring companies, and invoice discounting

How to Get Supply Chain Finance

At Clifton Private Finance, we have a dedicated team of short-term cashflow specialists, able to find the perfect supply chain financing for your business. Contact us today for more details.

To see what we can do for you, call us on 0203 900 4322 or book a free consultation below.

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