Supplier Financing

Updated on :  

08 min read.

Supply chain financing offers short-term credit that improves working capital and liquidity to both the seller and the buyer. Supply chain finance provides distinct advantages to all the parties involved in the supply chain: while a supplier gets quicker access to the funds it owes, a buyer could use its funds for a discount. Both parties could use the funds for other projects and keep their respective business operations running smoothly on either side of the equation.

Meaning of Supplier Financing

Supply chain finance, also referred to as supplier finance, refers to a mode of financing that a buyer initiates to help its vendor finance its receivables easily and at a lower rate of interest when compared to traditional funding sources, such as banks.

Besides allowing a supplier to get paid early, supply chain financing also encourages collaboration between buyers and sellers. There are various channels for supply chain financing such as dynamic discounting, reverse factoring, loans and advances from financial institutions, etc.

Supply chain finance is an essential part of supply chain management. It connects the buyers and the sellers with the financing institutions. Consequently, it helps companies lower their financing costs and improve their efficiency. Most importantly, supply chain financing unlocks the working capital tied to their supply chain. The process entails sellers receiving early payment from buyers on their receivables in exchange for a discount, allowing them to optimise their working capital.

Who can use Supplier Financing?

Supply chain finance works for companies across sectors, including manufacturing, automotive, retail, electronics. Today, platforms offer cutting-edge technology, allowing suppliers to tap into financial markets and efficiently manage their supply chain. 

Types of Supplier Financing Options

Invoice Financing/Invoice Factoring – Invoice financing is an alternate financing model that allows a business to borrow money against its customer dues. Invoice financing helps vendors ease their liquidity woes, allowing them to optimise their working capital requirements, by receiving payments for invoices before their due date, in exchange for a discount. Suppose the invoices are offered to a lender as collateral in exchange for a loan that the borrower repays after receiving payment for the invoices from its customers. In that case, it is classified as invoice discounting. 

However, if the invoices are sold to a financier, usually a bank or a financial institution, wherein the financier is responsible for collecting the payment for the invoices from the customers, it is classified as invoice factoring.

Reverse Factoring –  Reverse factoring is a supplier financing solution that allows a company to offer early payments to its vendors based on the approved invoices. Suppliers participating in this financing program could request early payment on invoices from the banks and other financial institutions. At the same time, the buyer sends the payment to such a bank or financial institution on the maturity date of such invoices. By offering reverse factoring to suppliers, buyers could reduce the chances of supply chain disruption, strengthen supplier relationships, and improve working capital position.

Reverse factoring isn’t initiated by a supplier but by the buying company purchasing goods or services from such a supplier. Accordingly, the rate of interest charged by the bank or other financial institution depends on the buyer’s credit rating instead of the supplier. This typically results in a reduced cost of funds that a supplier could otherwise achieve.

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