Supply Chain Financing – Definition, How it Works & How To Apply

    SCF (supply chain finance) is an important aspect of supply chain management. It links potential buyers and sellers with lenders. As a consequence, it assists businesses in reducing financing costs and increasing efficiency. Most crucially, it frees up operating cash that has been tethered to the supply chain. Trade Finance includes a section called Supply Chain Financing.

    Supply Chain Financing is a collection of services provided to medium- and large-sized businesses. Loans, Purchasing Order Finance, Factoring, and Invoice Discounting are just a few examples.

    Supply Chain Financing,

    Supply Chain Financing – Defination

    SCF stands for supply chain finance, which refers to a collection of technology-based solutions aimed at lowering financing costs and increasing business efficiency for buyers and sellers involved in a sales transaction. SCF techniques function by automating transactions and tracking the approval and payment of invoices from start to finish. Buyers agree to accept their suppliers’ bills for financing by a bank or other outside lender, referred to as “factors” in this paradigm. SCF also benefits all participants by providing a short-term loan that optimizes working capital and provides liquidity to both parties. Buyers receive a longer time to pay off their accounts, while suppliers get faster access to the money they owe. The parties can utilize the cash on hand for additional initiatives to keep their respective operations running smoothly on either side of the equation.

    Why use Supply Chain Finance?

    Supply Chain Finance is popular since it makes sales operations more convenient. It protects commercial transactions and encourages worldwide import and export activity. To put it another way, it’s a win-win-win situation (3 parties, 3 winners).

    Negotiating payment conditions with the buyer of the products (the debtor) is a typical procedure. For example, 60 to 120 days from the time the products are delivered to the time the invoice is paid. While waiting for the initial invoice to be paid, the buyer gains money.

    Similarly, the seller asks for finance so that he may get working money right away. For example, a financial injection helps businesses to grow stock or pay salaries. In addition, a short-term credit might aid in infrastructure development. Finally, using SCF, managers can gain access to opportunities that might otherwise be unavailable owing to a lack of liquidity.

    The Financing Institution acts as a mediator, onboarding and doing due diligence on counterparts first. It evaluates the seller’s and debtors’ eligibility using the Know-Your-Client method. In addition, the length of the business relationship and creditworthiness are examined. As a result, the business charges a fee based on the notional amount and the number of days funded. Indeed, the higher the fees, the longer the buyer takes to pay.

    How Does Supply Chain Financing Work?

    Supply Chain Financing, How Does Supply Chain Financing Work?

    When the buyer has a stronger credit rating than the seller, supply chain financing works best because the buyer may obtain cash from a bank or other financial provider at a cheaper cost. This advantage allows buyers to bargain with sellers for better conditions, such as longer payment periods. Meanwhile, the seller can unload its goods more swiftly in order to earn prompt money from the intermediate finance organization.

    Supply chain finance, often known as “supplier financing” or “reverse factoring,” promotes buyers and sellers to work together. This approach counteracts the usual competitive dynamic between these two sides. After all, in typical situations, purchasers want to postpone payment while sellers want to get paid as quickly as feasible.

    There are stages to supply chain finance using invoice discounting. They are as follows:

    • The vendor and the debtor are subjected to a background check and due diligence (s). As a result, this confirms that both parties are eligible to use SCF services.
    • The Seller sends an invoice to the debtor, who then sells it to the financial institution.
    • About 80% of the notional amount is advanced by the Financing Company. As a result, the institution safeguards a portion of its risk from the debtor’s insolvency.
    • The Debtor pays the whole amount of the invoice when it reaches maturity. The money are then transferred to the accounts of the financing firm.
    • The Intermediary reimburses the seller for the remaining 20% less the agreed-upon costs.
    How to Apply for Supply Chain Finance?

    Your firm must have been in operation for at least two years and have a revenue of at least ten million dollars. Both your firm and your supplier(s) have a proven track record of successful transactions.

    How Supply Chain Finance Works For Startups

    Supply chain financing is a method of securing funding for a startup by using the inventory of an existing company as collateral. It is usually used for companies that require large amounts of capital to get started or companies that want to expand their business but don’t have access to traditional bank loans.

    Extra Cautions To Be Taken

    SCF has lately slowed because of the difficult accounting and capital treatment involved with this technique, according to the Global Supply Chain Finance Forum, a coalition of industry organizations. This is mostly due to increased regulatory and reporting requirements.

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