Supply Chain Finance

Have you ever heard of the phrase ‘revenue is vanity, cash flow is sanity, cash is reality’? It portrays just how important cash and cash flow is for a business. It may look nice to have fantastic revenues and be making a nice profit, but the fact is that many businesses that have both of these go to the wall every year because they’re not managing their cashflow correctly.

There are various ways to help ease a business’s cash flow problems such as invoice factoring and invoice discounting, but there’s one method that you may not be aware of and that is supply chain finance.

What is supply chain finance?

Supply chain financeCompared to factoring and discounting, supply chain finance is a relatively new concept. Whereas in the past, businesses have used short term trading assets such as sales invoices to take advantage of invoice discounting and factoring, supply chain finance works in a slightly different way. Instead of advancing funds on the basis of a short term trading asset (sales invoice/accounts receivable etc), supply chain finance utilises short term trading liability as security (accounts payable), this becoming the source of the lender repayment.

This at first may seem slightly confusing. How can a trading liability be used as security? Basically, because unlike a factoring or invoice discounter whose contract is with the issuer of the invoice, a supply chain financier’s contract is with the payer of the invoice. The process can be illustrated as follows:

● Company A purchases goods from Supplier B
● B supplies the goods to Company A and submits an invoice to to Company A.
● Company A approves payment of the invoice on standard 30 days credit terms
● If Supplier B requires payment prior to 30 days, they may request immediate payment (with discount) from Company A’s supply chain finance institution
● In turn, Company A’s supply chain finance provider may extend their payment period for another 30 days, effectively giving them credit terms for 60 days rather than the 30 days as provided by Supplier B. Supplier B has also received payment and faster, so there are advantages to both the purchaser and supplier.

fundingIf you’re looking at improving your cashflow through the use of supply chain finance, it’s not something that you should enter into without fully understanding the ins and outs of the process. Different supply chain finance providers may have different terms and conditions and a mistake could prove costly in the long run.

It’s worth noting too that supply chain finance isn’t for everyone, and it may not be suitable for many businesses who may be better off utilizing other cashflow solutions such as invoice factoring or invoice discounting.

If you’d like a chat with an independent professional with extensive experience of supply chain finance, invoice factoring and discounting, give Factoring Solutions a call on 01827 707680.


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