Supply Chain Financing:
A Primer for Small Business 

Learn how to obtain this financing source to grow your business

Updated October 31, 2020

Supply chain financing generally describes a group of tools used in improving payments between businesses and their suppliers. This financial solution can be carried out in different ways.

What is supply chain financing?

This is also known as supplier finance. It offers a solution that optimizes the flow of cash by presenting businesses a chance to increase their suppliers' payment terms. As this takes place, the businesses are provided an option that settles their suppliers early which includes the large and SMBs. The end result is a win-win for both supplier and buyer. The available working capital is optimized by the buyer through this process, and additional cash flow for operation is made available to the supplier, that eventually affects the supply chain positively by reducing the level of risk. 

How does supply chain financing work?

Supply chain financing allows distributors and manufacturers to purchase finished goods or raw materials with the aim of fulfilling large orders or building inventories. Supply chain financing works through a partnership between the business and the finance company extending the supply chain business with trade credit. It functions as an intermediary between the supplier and the company.

Whenever a finished product or a raw material is needed for purchase, a purchase order is placed to the supply finance company instead of placing orders with the suppliers of the product. In turn, the finance company places the orders with the suppliers of the product and pays for them. Once the supplier receives the purchase order, they process and deliver the ordered products. The supply chain finance company pays and issues the business using their service an invoice. This invoice is payable between 30- 60 days on net credit terms.

A large business that modifies its terms of payment from 30 to 70 days risks affecting its chain of supply. This is because the suppliers would need to readjust and deal with the effect of a slower flow of cash. In this case, a “reverse factoring plan” can be put in place to assist its supply chain. This plan offers the suppliers a more affordable means to fund their slow paying invoices.

It should be noted that the reverse factoring plan is a post-delivery financing plan while the Supply chain financing is a pre-delivery financing plan. 

What type of business uses supply chain financing to fund their operations?

Supply chain financing works for businesses in a wide range of sectors including:

●  Automotive

●  Manufacturing

●  Electronics

●  Retailing

It is very useful for businesses on both ends of the supply chain. Purchasing businesses can use it in elongating their payment terms and it ensures that suppliers get their money paid earlier by so doing.

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The advantages and disadvantages of supply chain financing

Pros of supply chain financing

   

  

No Fees

No fee needs to be paid by the buyer in extending the payment term and the supplier is required to pay a little discount to receive early payment.

   

  

Get inventory for growth

Supply chain financing as a pre-delivery tool for financing can build the inventory of a business, ensuring its growth.

   

  

Minimal compliance issue.

The existing financing of the business is not interfered with, using this type of financing.

   

 

No lien required

A lien is not needed to be filed by the business in this financing type.

   

 

Effortless for customers 

The clients of the business are not required to do anything on behalf of the business.

   

 

   

Easy approval process 

Supply chain financing is available to any SME's whether as a product supplier or manufacturing business that meets the requirements to qualify.

Cons of supply chain financing

   

  

Not Available to All Businesses

Supply chain financing is a set of solutions which is not applicable to everyone. It is useful to a business that can be insured on credit. Businesses that cannot be or are not credit insured do not qualify to this financial plan.

   

  

Limited scope of qualification  

It only finances the costs of finished and raw products. Other costs cannot be handled using this type of financing.

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