Supply chain finance is a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and suppliers involved in a transaction. It is a form of financial transaction in which a third party facilitates an exchange by financing the supplier on the customers behalf. The term also refers to the techniques and practices used by banks and other financial institutions to manage the capital invested into the supply chain and reduce risk for the parties involved.
Supply chain finance works best when the buyer has a better credit rating than the seller, and can consequently source capital from a bank or other financial provider at a lower cost. This advantage lets buyers negotiate better terms from the seller, such as extended payment schedules. Meanwhile, the seller can unload its products more quickly, to receive immediate payment from the intermediary financing body.
Key features of supply chain finance include:
- Buyer-led financing: Supply chain finance is a buyer-led type of financing where the buyer works with a third-party financial institution that will pay suppliers quickly while providing the purchaser extended terms.
- Short-term credit: Supply chain finance provides short-term credit that optimizes working capital for both the buyers and the sellers.
- Payment assurance and risk mitigation: Supply chain finance offers payment assurance and risk mitigation for large suppliers.
- Collaboration: Supply chain finance encourages collaboration between buyers and sellers.
There are different structures of supply chain finance, including buyer-managed platforms, bank proprietary platforms, and SCF platforms managed by third-party providers. The main benefit of supply chain finance is that the buyer does not pay any fee to extend its payment terms and the supplier only pays a small discount if they want to get paid early.
In summary, supply chain finance is a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and suppliers involved in a transaction. It provides short-term credit that optimizes working capital for both the buyers and the sellers, and encourages collaboration between buyers and sellers.
