5 Myths About Supply Chain Finance

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Supply Chain Finance has evolved and become a more common source of funding, but many misconceptions remain about SCF. Watch out for the following five myths. 

Supply chain finance (SCF) started around 1980, revved up soon after the Great Recession of 2008 and 2009, and now comprises a growing range of techniques that enable companies to pay suppliers faster to help improve their liquidity. 

Today, many SCF programs use technology-based systems that automate transactions and are designed to decrease financing costs and increase efficiency for both buyers and their suppliers. 

Along with the evolving applications of SCF and its increasing usage across various industries worldwide, certain myths about SCF (sometimes referred to as “reverse factoring”) have also emerged. Here’s a look at some of the more common misconceptions that many companies have about SCF:  

Most suppliers can participate in a supply chain finance program.

In fact, the vast majority cannot participate. The percentage of suppliers participating in an SCF program can be quite low. This is mostly because the onboarding requirements of these programs are very exclusionary. The largest SCF banks require mounds of paperwork including, but not limited to:

  • Receivables purchase agreements
  • Company formation documents
  • Lien releases
  • Certificate of incumbency
  • Verification of bank information
  • Supplier set-up forms

Most companies are automatically excluded because they already have financing arrangements that prohibit any one of those documents from being executed. This makes most SCF programs extremely discriminatory against smaller businesses and those that are in under-represented categories.

Until roughly 2010, few options were available for buyers to pay suppliers early, according to Spend Matters. Only large financial institutions could fund SCF to an investment-grade buyer’s top suppliers. Discounts for early payments were available only through purchasing cards. 

Since 2010, companies with spends as large as $30 billion have had small percentages of their suppliers using early payment programs. The main reasons for this low participation include:

  • Most suppliers have a complex capital structure that prohibits their participation.
  • Payment terms are “a win/lose proposition.” Only the biggest companies with supply chain leverage can offer early payment options. Changing invoice payment terms between buyers and sellers is complex.
  • Many big companies use electronic procurement, electronic invoicing or a supplier business network as part of purchase-to-pay systems that include early payment. These methods cover the spend indirectly.
  • Finding sustainable funding is difficult. 

Banks are the only ones offering supply chain finance solutions.

Many large institutions now offer SCF as part of their treasury solutions. These providers also include emerging financial technology companies like C2FO.

The growing number of suppliers worldwide has scaled to meet increased demand for SCF. The Supply Chain Management Review identified seven key trends in 2019 as SCF has continued to evolve:

  • Companies are using their supply chains to better control working capital
  • More providers offering more financing
  • The definition of “fundable transaction” is expanding
  • Supply chain managers are now being perceived as “financial superheroes”
  • Blockchain technology is playing a larger role in SCF 
  • SCF is improving from the Internet of things, machine learning and artificial intelligence
  • Continuing demand for SCF among buyers and suppliers 

Supply chain finance solidifies buyers’ relationships with their suppliers.

This is not always the case. Many times, SCF is used as a unilateral tool to extend payment terms. Many banks administer SCF programs by helping suppliers get paid early while also extending days payable outstanding (DPO) for buyers, enabling delayed payment and cash conservation. 

But SCF programs’ static nature and specific terms can sometimes lead to bad relations between buyers and their suppliers. Some companies may even use SCF programs as leverage to greatly extend their payment terms. In a 2019 letter to the US Financial Accounting Standards Board, the Big Four accounting firms alleged that some companies are now trying to negotiate payment terms with their suppliers of up to 180 or more days. 

SCF can be a great solution for suppliers and buyers when payment terms are fair. But having an early payment program in which a supplier feels forced to accept a predetermined discount to build the cash flow needed to remain in business can create some hard feelings and fractured relations along a supply chain.  

With today’s technology, supply chain finance programs are easy to implement.

Despite emerging technologies that have transformed SCF, implementing these programs is not always easy or quick. 

Traditional SCF can take as long as six months to launch and may require client companies to dedicate several of their employees to the project. SCF can be paperwork-intensive, requiring lien filings, KYC verifications and other documentation. Setting up an SCF program with larger financial institutions can be an especially lengthy, costly and intensive process. 

Because of this time and complexity, an SCF program may only involve a handful of a company’s largest, most strategic suppliers. 

To involve more of your company’s suppliers, programs that involve greater flexibility across your supply chain, and more diverse solutions beyond just providing cash flow may be a better fit. 

Buyers have few good alternatives to traditional supply chain finance when providing early payment programs to suppliers.

This may have been the case a few years ago, but today there are other options for companies and their suppliers beyond traditional SCF. 

For example, C2FO’s unified, cloud-based Dynamic Supplier Finance (DSF) gives both buyers and suppliers more flexibility than traditional SCF programs, enabling them to address working capital goals together. DSF gives suppliers a say on how much discounting they will accept in exchange for being paid early, while buyers have the option to pay from their own balance sheets or from C2FO’s global network of funders. 

This flexibility helps ensure a reliable funding stream, which yields more participation among suppliers when compared to most SCF solutions. 

Traditional SCF programs also require extensive paperwork and set-ups. Top-tier vendors are often the only ones that can access these programs. Conversely, DSF engages small, medium and strategic suppliers, and offers competitive pricing and no spending restrictions, unlike traditional financing. This enables DSF to offer companies more control over how and when they fund invoices. Paying suppliers early addresses supply chain sustainability while preserving cash flow.

DSF’s advantages over traditional SCF include increased control, flexibility and scalability, and superior supply chain financial health — all backed on a single platform by C2FO’s worldwide network of buyers and suppliers. These strengths are especially important in the currently turbulent domestic and global economies. To learn more about DSF and other working capital solutions on the C2FO platform, click here.

In summary

Counter arguments to these and other myths about SCF and its alternatives point to evolving programs like C2FO’s DSF, which offers greater flexibility to buyers and suppliers to address their working capital needs. DSF is also inclusive for every single supplier. There is no paperwork, no liens, no exclusions and full flexibility for all parties. That flexibility is embodied by giving suppliers more control of how much discounting they will accept to get invoices paid early and by giving buyers the option to pay from their own balance sheets or from C2FO’s network of funders. Both of these elements ensure a reliable funding stream, which yields more participation of suppliers when compared to most SCF solutions.

DSF provides increased control, flexibility and scalability; a reduced cash conversion cycle; and superior supply chain financial health — backed by C2FO’s worldwide network of buyers and suppliers. The current turbulent domestic and global economies make these strengths especially important to buyers and sellers.