Supply Chain Finance

Also called reverse factoring, supply chain financing helps improve working capital access for buyers and suppliers.

Supply chain finance has gained popularity with businesses aiming to secure more working capital and build stronger supply chains.

What is supply chain finance?

Supply chain finance is a financing agreement that helps buyers and suppliers access more working capital — the money a business has available to cover short-term expenses. Supply chain financing does this by using a third-party lender to shorten invoice payment terms for suppliers and lengthen them for buyers. Suppliers can unlock cash from accounts receivable faster while buyers can hold on to cash for longer. 

Here’s how it works:

1. A buyer partners with a lender (such as a bank or fintech company) to fund a supply chain financing program.
2. The buyer invites its suppliers to join the program.
3. Participating suppliers complete work orders and submit invoices to the buyer.
4. The lender directly pays suppliers early in exchange for an invoice discount.
5. The buyer pays the lender the full invoice amounts within the agreed term.

Supply chain financing is meant to benefit all three parties: the supplier fuels its cash flow by receiving payment early, the buyer conserves cash to improve liquidity, and the lender profits from the early payment discount.

Supply chain financing vs. dynamic discounting

Supply chain finance is often confused with dynamic discounting, but there are some important differences. Buyers take advantage of dynamic discounting by funding early payments with their own working capital, whereas supply chain financing is funded by a third party. Also, because supply chain financing programs are established by buyers, there are some pros and cons for suppliers. For example, unlike dynamic discounting, supply chain financing solutions can require suppliers to accelerate all invoices rather than choose when to request early payment. 

With supply chain financing, buyers also determine the supplier’s discount rate for early payment. However, lenders use the buyer’s credit history to determine rates, not the supplier’s — so it can be a cost-effective way to access working capital for small to mid-sized suppliers when their buyers have healthy and well-established credit scores.

Innovative supply chain finance solutions allow buyers and suppliers to combine supply chain financing with dynamic discounting. For example, C2FO’s Dynamic Supplier Finance enables buyers to switch between funding early payment with either their own funds or third-party lenders. This gives buyers and suppliers a more flexible way to optimize working capital through early payment, allowing them to switch between solutions when it makes the most financial sense.

Why is supply chain finance important?

Insufficient cash flow is one of the main reasons that small to mid-sized businesses fail. Working capital solutions such as supply chain financing can give suppliers the cash boost needed not only to sustain business operations but also to expand and grow.

Low sales aren’t the only reason a supplier may struggle to maintain cash flow. Even if suppliers make consistent sales and are profitable on paper, lengthy payment terms can leave them without the cash necessary to operate and grow. Supply chain financing agreements help suppliers get paid faster when terms would otherwise leave them waiting 60, 90 or more days for invoices to clear accounts receivable.

These agreements can also be crucial for maintaining the stability of an entire supply chain. By offering suppliers early payment through a lender, buyers help generate low-cost cash flow to reduce risk and minimize the likelihood of supply chain disruptions.

The benefits

• Unlock working capital. Suppliers receive early payments in exchange for a discount, achieving the cash flow needed to thrive and grow. 
• Access low-cost financing. Suppliers can access working capital at a lower cost than traditional funding options if their buyers qualify for competitive rates from lenders.
• Improve cash flow visibility. Early payments help suppliers improve working capital metrics, such as days sales outstanding (DSO), and predict cash flow more accurately.
• Strengthen buyer-supplier relationships. Supply chain financing agreements with mutually beneficial terms can build win-win relationships and more resilient supply chains.
• Leverage flexible solutions. Fintech and alternative supply chain finance solutions are making supply chain financing programs more efficient and accessible for small to mid-sized suppliers.