How much capital is locked up within your supply chain at this very moment?
It’s a simple problem with a complex solution. As global supply chains grow and evolve every day, they trap vast amounts of working capital among the various stages between suppliers and end buyers. And as the financial managers of these supply chains are all too aware, that cash could be going to better use — launching new products and divisions, investing in new markets, and pursuing mergers and acquisitions, for example.
What Is Supply Chain Finance?
By leveraging short-term credit, supply chain finance (SCF) allows companies to access cash that would otherwise be caught up in the supply chain. With SCF, companies can lengthen payment terms to suppliers, while large and SME suppliers can get paid early — a mutually beneficial setup that makes use of working capital as the supplier generates additional operating cash flow. And this, in turn, minimizes risk throughout the entire supply chain.
To fully understand SCF, it’s also important to establish just what it is not. Supply chain finance is not an external funding source in the form of debt or equity. It does not require significant strategic shifts, such as reducing capital investment, selling assets, or implementing major organizational changes. It is not a loan, nor does it require that you work with a bank.
Also known as reverse factoring, SCF is a set of technology-based planning solutions built into a supply chain in order to optimize cash flow. Three primary methods guide SCF strategies:
- Increasing payables
- Decreasing receivables
- Decreasing inventory
Within these three categories, financial managers can utilize a long list of tactics, such as reverse factoring, dynamic discounting, term negotiations, factoring, P-cards, and letters of credit.
Who Benefits from SCF?
Supply chain financing serves as an essential tool for companies large and small across a wide range of industries. Retail, manufacturing, electronics, automotive, and countless other sectors leverage SCF strategies to improve relationships with both buyers and suppliers.
Below are some of the main benefits offered by effective supply chain finance agreements.
- Buyers have the potential to extend their payment terms without the obligation to “trade off” pricing.
- Suppliers have the chance to get paid early, with faster, simpler access to cash at beneficial rates.
- Strong relationships between buying companies and suppliers can improve competitive advantages in the marketplace.
- Overall supply chain stability is improved.
Why Is SCF Growing So Quickly?
As highly secure, advanced technologies such as blockchain entered the supply chain game, implementing SCF has become easier — and more effective — than ever before. As new technologies allow for enhanced transparency and accessibility for all involved parties, users now have instant access to real-time information.
By utilizing SCF in this way, more liquidity is freed up across the supply chain. Buyer-supplier relationships become more highly valued, better synced, and more strongly engaged. And, of course, it frees up money that businesses can put to use toward long-term goals; with smart SCF in place, mid-market companies can suddenly invest millions of previously inaccessible dollars in new growth initiatives or can use the money to pay down debt.
SCF creates a lock-pick-solution for companies looking to get to the cash they need when they need it — without external financing and with wins for everyone involved.