Supply chain finance is a type of business funding used by large buyers, such as supermarkets to facilitate and improve transactions within their supply chain. It means their suppliers can get access to funds early and the buyers themselves can delay payment without penalty. It improves cash flow for both parties, who each pay a fee to a third-party financier.

Supply chain finance can also be known as supplier finance, or reverse factoring. This is because it is similar to invoice finance, although is initiated by the buyer rather than the seller.

Typically, the buyer is a larger business than their supplier. They have a better credit rating, so can, therefore, secure better terms from the financier.

An example would be a large supermarket such as Coles or Woolworths. They would offer supply chain finance to their huge number of suppliers, often as a prerequisite of doing business with them. The risks for the financier from such a large business are low and the favourable rates they get are passed on to the suppliers, who'd be unable to get such terms themselves.

What do buyers and sellers get out of it?

In traditional business transactions, there are conflicting interests. For reasons of cash flow, suppliers want to get paid as quickly as possible and buyers want to delay payment. Supply chain finance addresses both of these needs:

  • Suppliers can get paid early, helping them to avoid potential cash flow gaps.
  • Buyers can delay settlement, with this extended payment period bolstering their cash flow. This also means they can avoid potential late payment penalties.

Reverse factoring encourages collaboration and improves relationships in the supply chain. Whilst deals with large supermarkets is a key objective for many small businesses, the resulting cash flow issues can prove a real dilemma for them.

Supply chain finance platforms and financiers

Supply chain finance requires the involvement of a supply chain finance platform; web-based software which often integrates with the accounting platforms of both the buyer and the supplier. It is backed by a financial institution who often run the platform. Fees are paid by both parties. The fee the supplier pays is linked to how quickly they want to receive funds.

Advantages of supply chain finance

Benefits of supply chain finance to the buyerBenefits of supply chain finance to the seller
Delayed accounts payable, leading to improved cash flowInvoices paid early rather than 30 days or more, improving cash flow
Improved relationship with their sellers - helps to facilitate deals by removing potential supplier cash flow issuesFosters cooperation and relationships with big buyers. It may even be a requirement of dealing with the buyers. Allows suppliers to make deals that may not otherwise have been possible
Longer payment terms without having to negotiate on priceImproved cash conversion cycle - the time it takes from the purchase of raw materials or production of goods to receiving payment
Early payment discounts may be available, whilst invoices are paid at maturity / past due dateFaster access to cash allowing businesses to grow, hire staff and fulfil more orders
Can negotiate better rates with suppliers upfrontReduced accounts receivable meaning reduced admin and less risk

Other types of business finance

Secured loan

A loan guaranteed against business collateral. The assets commonly used to secure the funding include property, equipment and vehicles.

Loan repayments are over a fixed-term period and must be repaid with interest (either fixed or variable) - fees and charges also apply. In the event of default, the lender can recoup funds by repossessing and selling the assets.

Secured business loans are suited to established businesses who have assets on the balance sheet and with a strong financial history. Due to the reduced risk, they tend to come with lower rates and longer terms.

Unsecured loan

Unsecured business loans are not guaranteed by the assets of a business, such as property, machinery, vehicles or other equipment. Therefore, there is nothing for the lender to repossess should the borrower default.

This leads to a higher level of risk with higher rates, lower loan amounts and shorter terms. Repayments are fixed-term and interest rates and fees apply.

Unsecured loans are offered by traditional banks, as well as online lenders. Often taken by businesses without suitable collateral or unable to get other types of loans due to their financial history.

Business line of credit

A regular source of funding for larger businesses. It is a flexible credit line on which businesses can access funds as required. Cash can be drawn on, up to an agreed limit without the requirement to reapply. Interest is often charged daily on the account balance.

Similar to a business overdraft or credit card but used for planned expenditure such as general working capital, regular seasonality, stock and materials.

Business overdraft

A line of credit that typically comes included with a business bank account. Allows for transactions when the account balance is empty. The funds borrowed are repaid and can be drawn from again and again, without the need for further application. Interest is charged on the amount borrowed and fees apply.

Used for short term opportunities and cash flow, not recommended as a source of regular working capital.

Business credit card

Like a personal credit card, but with multiple holders and used for short-term business expenses. Often repaid within the same month to avoid high fees.

Used for immediate expenditure and not recommended for ongoing costs like working capital, payroll or stock.

Invoice finance

A type of short-term funding used by businesses looking to ease cash flow gaps. Funds are secured using the capital tied up in invoices issued by the business.

Takes the form of upfront funds or a line of credit. Can be:

  • Invoice factoring, where the invoice ledger is purchased by a third party who is responsible for collections, or
  • Invoice discounting, where collections remain the business of the borrower and the invoices are used as security only.

Used to assist with cash flow problems caused by payments terms from a business' debtors.

Other loan types

Other types of funding include equipment finance and trade finance, used by businesses with asset requirements or making international transactions.

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