Explore by Topic
Explore by Type
C2FO Powers Early Payment Programs for the World’s Largest Companies.
Discover expert insights on working capital, cash flow optimization, supply chain management and more.
We believe all businesses can and should have equitable access to low-cost, convenient capital to grow and thrive.
Supply chain finance is here to stay, but emerging regulations and fintech options may change how you approach this funding strategy.
High interest rates and strict lending standards mean that many companies are looking for nontraditional means of financing. In an effort to optimize working capital, some businesses have opted to extend payment terms with their suppliers. However, this in turn restricts your suppliers’ cash flow, which can quickly break down the supply chain as vendors struggle to fund business operations and growth.
Alternatively, supply chain finance (SCF) supports a more likely win-win scenario, enabling you to lengthen terms while ensuring that suppliers have the opportunity to be paid early. Unsurprisingly, SCF has been on a steady growth trajectory since 2020 as companies seek cost-effective ways to boost their balance sheets without compromising supply chains.
The solution is particularly attractive to small to midsize enterprises (SMEs), which represent around 90% of global businesses. According to the World Economic Forum, over two-thirds of SMEs are struggling to survive and expand, with a quarter citing funding and capital access as their main challenge. Yet many SCF programs only cater to large suppliers with the resources to take on demanding onboarding processes and terms. However, more inclusive programs, largely led by fintech companies, are entering the marketplace as SCF demand grows.
How does supply chain finance work, and what SCF trends can finance and treasury professionals anticipate in the year ahead?
Supply chain finance, also called reverse factoring or supplier finance, is a type of financing that uses a third-party lender to fund early supplier payments. In an SCF program, a buyer partners with a lender — usually a bank or fintech — and invites suppliers to participate. Participating suppliers receive early payments from the lender on approved invoices in exchange for a discount, helping fuel cash flow. The buyer then pays the lender in full within an agreed term, with the lender profiting from the discount.
Buyer-lender payment terms often give buyers a wider payment window than they would be able to fairly negotiate with suppliers, allowing them to retain cash. For many suppliers, the discount cost is often competitive with other financing solutions because program rates are based on the buyer’s credit performance.
Supply chain finance is becoming an increasingly important source of capital for companies, especially SMEs that don’t qualify for conventional products such as business loans. If you’re considering SCF or have already implemented a program, here are some considerations as you plan for 2024.
More than a short-lived reaction to the pandemic, estimates on SCF activity suggest that this type of financing is here to stay. According to BCR’s 2023 World Supply Chain Finance Report, global SCF volumes increased by 21% between 2021 and 2022. With interest rates expected to remain high throughout 2024, businesses will most likely continue relying on supply chain finance as an alternative to business loans and public or private fundraising.
While the popularity of supply chain finance is usually considered in the context of US and European markets, more developing countries are leveraging the solution as a way to make capital accessible to SMEs. BCR also found that the strongest regional growth rates for SCF volumes between 2021 and 2022 were in Africa, at 40%, with Asia the next strongest region at 28%.
In the long term, the growth of supplier finance may be further supported by digitally transforming trade processes. According to the World Trade Organization, less than 1% of trade documents are fully digitized. New legislation, such as the UK’s Electronic Trade Documents Act (ETDA) introduced in July 2023, is making it easier for companies to eliminate paper-based trade finance agreements. McKinsey analysis shows that electronic trade documents could save $6.5 billion in direct costs and facilitate $40 billion in worldwide trade — good news for global enterprises that use supply chain finance.
In 2024, more companies will be required to report on the size of their supply chain finance programs due to new US and international regulations.
Historically, supply chain finance transactions have been documented as accounts payable on financial statements with no obligation to disclose program terms. New reporting standards serve to improve a business’s financial transparency for investors, rating agencies and auditors, ultimately making SCF-funded companies more appealing investments.
In 2022, the Financial Accounting Standards Board published new SCF reporting standards aiming to clarify annual program activities, changes and size. It requires buyers to outline their programs’ key terms, including timelines and secured assets, as well as outstanding buyer payments. Similarly, the International Accounting Standards Board (IASB) issued a disclosure mandate in May 2023, calling for companies to indicate:
The IASB disclosures, which were initially set to commence in 2025, have been moved up to a January 1, 2024, start date. Finance and treasury teams will need to budget additional time and resources to fulfill these obligations next year and beyond.
New sustainability reporting rules should also be considered by companies using SCF programs. Regulations such as Europe’s Corporate Sustainability Reporting Directive (CSRD) cover Scope 3 emissions, which include those originating from your supply chain. To improve reporting, businesses may consider using supply chain finance to incentivize suppliers that use greener practices.
Traditional supply chain finance programs delivered through banks are usually accessible to top-tier suppliers only. This is because bank-led programs are notorious for costly and resource-intensive onboarding processes that aren’t feasible for small businesses. Some suppliers may also already have financing agreements or capital structures that prohibit participation. What’s more, banks can cancel SCF programs to protect themselves against risk if the economy takes a turn.
But this is changing, thanks to fintech innovations. SCF’s popularity and new reporting laws are prompting many banks to partner with fintechs for program delivery. In some cases, fintechs are creating non-bank solutions independently to fill accessibility gaps for a variety of suppliers.
For example, C2FO’s Dynamic Supplier Finance combines supply chain finance with dynamic discounting — an early payment approach that adjusts discount rates based on the payment date. Here’s how it works:
C2FO’s approach improves supplier adoption, which strengthens your supply chain and makes it more valuable than traditional SCF. This is because the program supports both large suppliers and SMEs. Being able to choose your funding source on demand also gives you more control while offering suppliers reliable early payment access regardless of which option you choose. Moreover, flexible funding makes the program sustainable, even when banks may otherwise rescind supply chain finance agreements.
While supply chain finance has been around for years, the practice is currently enjoying a renaissance, with an uptick in global volumes likely to persist in 2024. While traditional supplier finance solutions have mostly benefited larger suppliers, new and evolved offerings, including those offered by C2FO, are making it available to more and more companies. New reporting standards will only further SCF’s expansion by helping attract investment. If you’re in the market for a supply chain finance program, consider a fintech solution that will truly benefit your entire supply chain and help you get the most out of your investment.
Discover how C2FO’s solutions make it easier for enterprise buyers to support their suppliers financially.
In this article:
Use these three 2024 procurement trends to guide your planning for the coming year.
Minimizing supply chain risks can lead to reduced liquidity for global enterprises. Thankfully, there are ways to address both to optimize your balance sheet.
Subscribe for updates to stay in the loop on working capital financing solutions.
5 min read
7 min read
8 min read