Supply Chain Finance
Supply Chain Finance is another type of ‘cash advance’ Working Capital Finance, similar to Invoice Financing – but it’s purely based on the credit ratings of the companies in your supply chains.
Essentially it allows small SMEs to piggyback off the higher credit scores of their buyers, while also allowing the buyers to increase their credit terms, without putting the suppliers at risk.
An example to explain
Tesco buys Vegan Crackers from Lauren’s Crackers Ltd, a small Cracker supplier in the Brecon Beacons. Tesco pays invoices in 180 days, while Lauren’s Crackers are small and need cash quickly to keep supplying crackers.
Savvy Tesco’s knows that the majority of their suppliers will be in the same position as Lauren, so they may promote supply chain finance or Lauren may wish to suggest to Tesco supply chain finance.
How does it work?
A bit like Invoice Financing, Lauren issues the invoice to Tesco’s. Tesco confirms to the lender that the invoice is approved for payment. Lauren gets paid by the lender straight away (minus a small fee). Tesco’s will then pay the lender when the invoice was originally due or at a due date they have arranged with the lender.
This not just allows the suppliers to Tesco have their payments quicker, it also allows Tesco to potentially arrange a longer payment term with the lender, freeing up cashflow.
There are lots of positive to come out of Supply Chain Finance. It is essentially a tool that can allow businesses of all shapes and sizes to work with each other while creating some great stability in a supply chain. Some highlights of Supply Chain Finance are:
- It allows small companies to sell to large companies. Quite often large companies procurement rules stop small SMEs supplying to large corporations. Supply Chain Finance de-risks this for large customers.
- As large companies are able to use the Finance Companies to push out their payment terms, it allows large corporations the opportunity to stabilise their cashflows. It also allows the suppliers to get paid sooner, so they have the cash to keep producing goods.
- It stabilises the supply chain. By making sure all parties have working capital, then suppliers are able to supply more stock to large companies quicker and easier. Fixing one of the biggest risk issues with large corporations working with small businesses.
- As Supply Chain funding is based on the buyer’s credit rating, it can be cheaper than invoice financing, which is based on the companies credit rating.
- Supply Chain Finance helps the whole eco-structure and relationships of a business. It affects all parties involved, rather than just the company supplying the goods.