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Supply Chain Loans: Reverse Factoring For Suppliers

Historically, supply chains were filled with late payments between buyer and seller, plenty of frustration, and less working capital due to those late payments. Over time, mainly due to the rapidly expanding innovative technology sectors, supply chain systems have become more efficient. Through the evolution of supply chain finance systems, many suppliers and buyers are finding more flexibility in payment schedules which strengthens working capital for daily operations. But what does supply chain financing even mean?

The most basic definition of supply chain finance is referred to as funding programs for buyers in the supply chain who needs funding for two main reasons: to obtain financing for their suppliers or to obtain funding in order to finance their receivables at a lower, discounted rate. The most common industries that utilize these supply chain finance services are retail sectors, manufacturing sectors, consumer products, automotive, agriculture, chemical businesses, and the pharmaceutical industry. In the past, supply chain finance was not an option for small or medium sized businesses, especially after the Great Recession. Big incumbent banks did not want to lend to smaller companies during, and after, the 2008 recession, thus leading to many forms of financing, but especially supply chain finance, being limited to large scale Fortune 500 companies.

Thanks to the technological revolution that has been rampant in the world today, access to supply chain finance options are now available to all sized companies that have a need for supply chain funding support. The three most common characteristics of the businesses that typically need supply chain finance services are:

  1. Companies that have global supply chains.
  2. Companies that have extensive supply chains.
  3. Companies that have substantial lead time (when inventory gets purchased to the time the order gets approved.

Breakdown of Supply Chain Financing

Supply chain business loans have become essential for any business that is heavily reliant on supply chain systems, especially at a global level. This has led to the dependence on supply chain finance systems become integral for most supply chain based businesses in the United States today. The process of supply chain finance programs tends to vary from business to business based on a business owner’s objectives and operations, often leading to customized supply chain finance services.

In general, the typical process of supply chain finance works to lower financing costs for all parties involved while working to improve business efficiency, which ultimately positively affects both the buyer and seller. Supply chain finance essentially provides short term credit to increase working capital for both parties through technology based platforms, leading to faster invoice approval and settlement processes throughout the whole supply chain cycle.

Supply chain finance transactions include: extension of a buyer’s accounts payable terms, inventory finance, and payables discounting. While the process for supply chain financing seems complicated, it is actually relatively simple and much more efficient and reliable (once approved by a bank or financial technology company).

The supply chain finance process starts when the buyer purchases goods from the supplier, and then the supplier, naturally, invoices the buyer for the cost of the inventory shipped. Then, the buyer processes those invoices for payment; this is when the buyer issues the approved invoices through the financing company. Based on rates and terms established between the supplier, buyer, and bank or other financial institution, the finance company then purchases the approved invoices from the supplier at a discounted rate; this discounted rate is often based on the buyer’s credit history and credit profile. Now the debt is settled with the supplier, allowing the supplier to have working capital much faster than when waiting for a buyer to pay on typical billing terms (which is often 90, 120, or more days after purchase). This process also greatly benefits the buyer because the buyer does not have to pay the full cost of the payment to the bank until the maturity date.

In the end, supply chain finance systems provide buyers and sellers to put their working capital to more efficient uses, while allowing both parties to focus on other important business matters. Through supply chain finance, suppliers are paid much faster than they normally would be, and buyers are put in good financial standings while freeing operating cash for more strategic business purposes.

Fintech and Supply Chain Finance

As mentioned above, supply chain finance options were often offered by incumbent banks that reserved this service for large scale companies – but financial technology companies have completely revolutionized the accessibility and ease of supply chain finance for all types of businesses. Financial technology, otherwise known as FinTech, is really any technology based business that focuses their rapidly growing innovative work on alternative financial services. These financial companies utilize modern software and technology platforms to offer a variety of essential technology financing and loan services to all types of businesses, both large and small.

Since the creation and implementation of credit cards, financial technology has disrupted the financing industry, but the 2008 Global Financial Crisis is credited with the rapid expansion and innovation of the FinTech industry. During this time, incumbent banks were unable to loan to most businesses, and even if they were lending to smaller businesses, most American’s were too furious with the banking systems to explore those lending choices. Through the innovative aspects of technology startups, FinTech companies everywhere started catering to the needs of business owners across the world.

With technology fueling global expansion, the need for FinTech companies to offer supply chain finance choices was imminent. Today, financial technology businesses are revolutionizing the way supply chain financing is done, making it much more efficient than ever before. FinTech businesses are also expected to continue to disrupt the way supply chain finance is done by offering more innovative services and alternatives than any incumbent banking system could. Through FinTech companies, many supply chain businesses that work with global suppliers, which most do because so many items are imported from other countries, are finding more efficient supply chain finance options through financial technology companies.

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