Overview of supply chain finance
Supply chain finance is something that is quite needed nowadays as the supply chains of the corporations simply demand for a greater financial efficiency. This is also due to all the suppliers and the companies that they supply being under pressure to reduce the prices, to improve the efficiencies of the cash flow and to improve the payment terms.
Supply chain finance (which is a form of reverse factoring and lending based on assets) and the solutions that it is going to bring are aimed at the improvement of the supply chain’s financial efficiency which eventually will result in both buyers and suppliers that can enjoy a reduction of substantial amount in the working capital through the finance programs for vendors and suppliers.
The supply chain finance solutions that are optimal are provided to the clients of this service through working capital solutions, reverse factoring structures and payables financing expertise. Also, these solutions will be based on facts only, and by facts I mean reports in real time of the asset data. There are supply chain finance platforms that are based on assets and based on the Internet, which streamlines the supply chain finance solution’s execution through a complete automation of the process of supply chain finance, which results in benefits for both the suppliers and buyers that include a flow of cash. For the financiers, there is a management solution which takes the form of a simple automated transaction.
Now let’s take a look at the structure of supply chain finance. The process of reverse factoring will begin with an invoice which will be sent from the supplier to the buyer. Once this is through, the buyer will approve this invoice and they will upload it to the platform which will create a payment obligation that is going to be irrevocable. After that the supplier will be able to sell this invoice (a finance that is based on assets) to the financier. The rate that this invoice will be sold at is going to be based on the risk for the buyer and most of the time will be quite attractive. The financing transaction for the payables is made to be a ‘true sale’. In this kind of transactions the risk will be transferred to the financier and not the supplier. Let’s make an example for that with a supply chain that has terms for 75 days. In this supply chain, the supplier might receive their payment at the beginning of the term, for example day five. The buyer, on the other hand, will be able to pay the financier on the last day of the term and everything will take minimal fees. Supply chain finance’s success depends on integrity and visibility of the invoices in real-time. That way all the participants involved in the structure can track invoices, settlements and advance payments. In case the process wasn’t automated, the efficiency would suffer greatly because the main purpose of it would be defeated.
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