While an established practice, SCF is often misunderstood, both functionally and reputationally. Generally speaking, supply chain finance, sometimes referred to as reverse factoring, covers the financing needs of sellers providing goods and services to large buyers where sellers can access third-party financing for invoices.
It is worth noting that dynamic discounting is a related solution often lumped together with supply chain finance. In dynamic discounting, the buyer funds the program, enabling sellers to access early payments on invoices in exchange for a discount without third-party capital.
SCF fulfills the basic need of financing the working capital necessary to run any business. When successfully delivered, SCF benefits the entire buyer/seller dynamic and it improves certainty for sellers by providing payments for delivered goods and services earlier than agreed terms with the buyer. SCF enables stable, on-demand, reduced-risk transactions that facilitate better relationships between sellers and buyers.
In its simplest form, supply chain finance takes place in five stages:
While the general process is universal, providers can vary. Traditionally, supply chain finance programs were the exclusive purview of banks. Banks have the balance sheets to give them the wherewithal to support buyers and sellers financially, however, they are often hampered by technology limitations that make the process difficult. In response, SaaS vendors and their platforms have emerged as major players in the supply chain finance industry. Unfortunately for buyers and sellers, SaaS offerings often lack substantial financial resources in their balance sheet and rely solely on third-party funding to scale to adequately meet working capital needs.
The best solutions combine access to diverse funding sources (including banks and other financial institutions, as well as the SaaS company’s own balance sheet) with a modern, cloud-based platform. When a single supply chain finance provider has both, as LSQ does, buyers and sellers can access a reliable source of capital faster, safer and with more transparent decision-making tools for risk mitigation and credit analysis.
Buyers are increasingly seeking to improve their cash conversion cycle by extending payment terms to sellers. Sellers need greater predictability in their cash flow but lack access to adequate sources of capital. This conflict has the potential to reduce liquidity and resiliency across supply chains. A successful supply chain finance program balances these conflicting needs of buyers and sellers.
Improved Relationships with Sellers – Participating in a supply chain finance program helps sellers bolster their working capital, creating a situation that encourages the continuation of a successful partnership.
Optimized Working Capital – Supply chain finance programs free up cash and lower cost of capital (when compared to traditional financing) by extending payment terms.
Diversified Supplier-Pool – By providing options for fast, flexible access to cash, more sellers are incentivized to do business with you.
Stronger Supply Chains – By supporting your sellers with more predictable cash flow, their businesses are in a better position to be a partner in your business growth.
Improved Liquidity – Supply chain finance programs provide sellers with payments in as little as 24 hours, instead of waiting 30/60/90-plus days dictated in the original terms with buyers.
Payment Certainty – Sellers can choose when and which of their approved invoices get paid when participating in a supply chain finance program.
Predictability – With supply chain financing, sellers can prevent gaps in production, allowing for flexible forecasting and growth.
Reduced Financing Costs – Accessing working capital through a supply chain finance solution is often a more affordable option than other types of financing.
Liquidity and certainty are often hard to come by in today’s challenging economic environment, which is unfortunate since the overall health of your business is dependent upon having reliable access to working capital. A well thought out and managed supply chain finance strategy can help sellers bridge the gap between their cash needs and extended payment terms and can help buyers hold on to their cash longer to make the best use of their financial resources.
To learn more about LSQ’s working capital solutions, visit https://www.lsq.com/supply-chain-finance/.