In today’s globalised marketplace, where businesses rely on intricate networks of suppliers and partners, the fluid movement of goods and services is key. Yet, orchestrating this complex choreography requires more than just logistics; it demands a financial instrument known as supply chain finance. So, what exactly is supply chain finance, how does it work, why is it indispensable for modern businesses and what role will digitisation play in its development?

Supply chain finance, often termed supplier finance or reverse factoring, is a financial solution that serves as the linchpin for efficient cash flow management throughout the supply chain. This multifaceted approach encompasses an array of techniques and tools meticulously designed to optimise a company’s working capital. It achieves this by ensuring prompt payments to suppliers, thereby guaranteeing the unimpeded operation of the entire supply chain.

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How does it work?

To comprehend this concept better, consider a practical example. Visualize a colossal British retail giant like Tesco, intricately connected to a web of suppliers, including farmers, manufacturers, and distributors. These suppliers provide Tesco with the goods required to fill its shelves, but an inevitable time lag often exists between the receipt of these goods and the payment to suppliers.

Enter supply chain finance. A financial institution, typically a bank, steps in to offer early payment to the suppliers on behalf of Tesco. This prompt payment ensures that suppliers receive their dues without delay, allowing them to continue their operations seamlessly. In return, Tesco, as the buyer, commits to repaying the financial institution at a later date.

According to the British Business Bank, “supply chain finance involves a supplier receiving early payment of an invoice by a finance company. The business that has purchased the goods or service then pays the funder once the invoice is due.”

The full process for supply chain finance is described by the BBB as follows:

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  1. The business buys goods or services from a supplier;
  2. The supplier issues an invoice to the buyer with payment terms outlining when it needs to be paid;
  3. The buyer approves the invoice and uploads it to a supply chain finance platform; 
  4. The supplier uses the platform to request early payment of the invoice; 
  5. The lender sends the payment to the supplier, minus a fee which is based on the credit rating of the buying business; 
  6. The buyer pays the finance company providing the supply chain finance when the invoice payment is due according to the payment terms.

The benefits for businesses

This form of financing yields numerous advantages for businesses, making it an essential tool. Here are some key benefits:

  1. Improved cash flow: It enables businesses to maintain healthier cash flows. They can pay their suppliers promptly without depleting their own liquidity, guaranteeing a steady supply of goods.
  2. Enhanced supplier relationships: Timely payments to suppliers foster goodwill and stronger relationships. This can lead to better terms and pricing agreements in the long term.
  3. Reduced risk: By providing financial stability to the supply chain, supply chain finance minimises the risk of disruptions caused by supplier insolvency.
  4. Working capital optimisation: Businesses can use their working capital more efficiently, redirecting it towards growth opportunities instead of holding it as a buffer for supplier payments.

Direction of digitisation

The digitalisation of supply chain finance involves integrating technology for more efficient and transparent processes. It includes electronic documentation, blockchain technology for secure transaction records, cloud-based platforms for collaboration, automation of tasks such as invoicing, data analytics for insights, and application programming interfaces (APIs) for data exchange. 

E-invoicing streamlines invoicing, while mobile apps offer on-the-go access. Cybersecurity measures protect sensitive data. Machine learning and AI analyse data for cash flow predictions and risk assessment. IoT monitors goods in transit. E-signatures and real-time payment systems expedite approvals and fund transfers, enhancing efficiency and reducing costs throughout the supply chain finance ecosystem.

A quiet achiever

Supply chain finance operates behind the scenes as a vital financial tool underpinning how business today is done. Its capacity to fortify cash flows, enhance relationships, mitigate risks, and optimise working capital renders it indispensable for businesses navigating the complexities of the global marketplace.

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