This is the first in a series of two brief articles looking at what Supply Chain Financing is, what are it’s benefits and what future trends we can expect.
What is Supply Chain Financing?
This term refers to several activities engaged in by companies and their supporting financial institutions. All of these endeavors are aimed at improving the company’s cash flow by moving money faster through the supply chain. They most commonly include factoring, reverse factoring and automated early payment discounts. Many companies will go through a bank for this; others prefer to deal with institutions dedicated solely to supply chain financing.
A factor is a financial institution that buys accounts receivable from businesses allowing them to avoid the waiting period between the time they sell a product and the time they collect their money. The act of buying and selling these invoices is called factoring. It is an old concept that is enjoying a remarkable rise in popularity right now.
Sometimes a purchaser will ask a factor to buy the accounts receivable he owes to his supplier. Usually the buyer wants to extend his payment period for a longer time than the supplier will allow, while taking advantage of early payment discounts. In this case, the factor will charge the purchaser a fee for the transaction. The buyer will be able to hold on to his money longer while the supplier gets his payment right away. This is called reverse factoring.
Early Payment Discounts
With many early payment discounts, the financial institution acts as a dynamic partner with the purchaser, finding suppliers that will discount their goods in return for early payment. Sometimes the institution has a list of suppliers with whom they already do business. At other times they negotiate a deal on behalf of the purchaser. Often these involve sliding scales of discounts depending on when the invoices are paid. The purchaser can then ask for reverse factoring or for assistance in keeping track of what they need to pay to take advantage of the discounts.