There can be times when the cashflow in a business comes to a grinding halt. The most common problem faced by small businesses is the lack of cashflow, which in turn impacts the day-to-day running of business activities and longer term business development goals. Whilst some businesses may consider the use of a loan to raise working capital, the use of supply chain finance can often be a more viable option.
What is Supply Chain Finance?
Whilst similar to invoice finance, the use of supply chain finance is different in that it is based on the credit rating of companies that operate in the supply trade.
Because larger companies are more likely to make the payment by the date that it is due, suppliers who use these larger companies can get the value of the invoice from a lender minus a small fee, and the cost will be recouped from the payment of the invoice itself.
The following is an overview as to how working capital can be raised using supply chain finance.
- An invoice is issued to the buyer by the supplier.
- The buyer then informs the lender that an invoice has been approved.
- The supplier then receives the value of the invoice, minus the lender fee.
- The buyer then pays the lender by the invoice due date.
Supply chain finance is a collaborative process between three parties which consist of the buyer, the supplier and the lender. As such it’s different to other facilities such as invoice finance.
The Benefits of Supply Chain Finance
The use of supply chain finance ensures that the suppliers can be paid within a few days, and as a result the business cashflow is therefore stabilised.
This stabilisation consequently allows suppliers to free up previously tied up money, in order to be used for business expansion, new purchases or the refinancing of existing debt.
Supply chain finance is also beneficial for the buyer as it allows them to extend their payment terms without causing friction with the suppliers. Furthermore, the finance can mean that those looking to buy services can benefit from trade discounts due to the longer payment terms available.
The Cost of Supply Chain Finance
When raising finance there are always factors that need to be considered, and the cost of supply chain finance can depend on the lender used, as well as the usage.
The use of supply chain finance tends to be more viable than the use of other financing options, due to the fact that suppliers are receiving all off their money minus a small fee as opposed to a percentage of the invoice value.
As a result, this allows for more working capital to be made available and can still be cheaper than other forms of funding, including lender to lender options.
Like other forms of finance, supply chain finance won’t be the right choice for everyone but can be a useful facility for those that operate within supply chain intensive sectors that are looking for a cost-effective way of maintaining a seamless cashflow.
