Supply Chain Finance is a term used in a variety of different funding situations, which can lead to some confusion as it covers two different methodologies in business finance.  These are:

  1. A method that provides finance for your purchases or manufacturing costs, which then flows into the finance of your sales invoices.
  2. A method that provides finance to your suppliers: businesses in your supply chain, receive funding as a result of your purchase order and the strength of your business.

How these business finance solutions work

Under the first funding method a buyer’s suppliers receive finance, based on the strength of the buyer’s business. This form of supply chain finance has historically been known as Reverse Factoring.

The supply chain in this instance relates to suppliers to the buyer’s business and the instigator of the finance is usually the buyer. The buyer will identify those businesses within their supplier base that would benefit from faster payment terms than their existing contractual agreement.

They will then find a provider of this type of ‘supply chain finance’ or ‘reverse factoring’, and request that they fund their suppliers by providing finance against the invoices the supplier raises to the buyer. These transactions will be based on the balance sheet of the buyer and not that of the supplier. The finance provider will fund the individual invoices the supplier has raised to the buyer on normal invoice discounting terms.

Under the second funding method a business secures funding for each step of their business process, from order through to sale. This process would start with a trade finance facility where you would normally be funding an order from a customer which, when delivered, is usually in a finished state.  This can be either domestic or international.  This is sometimes called a Purchase Order facility.

If a company is a manufacturer, it is also possible to finance the construction process for a firm order.  This would be in the form of stage payments that would be made available at specific stages and would likely be measured by some form of professional valuer before the finance is released.

Once the goods have either been delivered to your warehouse, or you have finished the manufacturing process, delivery can be made to your customer.  At this time you will be able to raise the invoice which can then be financed from an invoice finance facility and the trade finance or stage payments repaid. The invoice finance facility will advance anywhere between 70% and 90% of the total value with the balance being paid to you when the invoice is settled by your customer.

Trans Capital Insider tips

  • There is no reason at all that any business buying in goods to satisfy orders from business customers shouldn’t use traditional supply chain finance; with a trade finance facility flowing through into an invoice finance facility.
  • The ideal situation is for the transaction to be based on the purchase of finished goods for confirmed orders.  It is much more difficult to fund stock purchases on the basis of historic sales.
  • Supply chain finance, or reverse factoring, can also be an exceptionally effective tool to ensure the sustainability of the businesses that make up your supply chain by helping them have a healthy cash flow.

 

If you are a supplier to a large company and you would like to be able to receive payment quicker than the agreed payment terms, you could suggest to your customer that they investigate supply chain finance or, as they may know it, reverse factoring.  The advantage to them would be a happier and more financially robust group of suppliers who were receiving cash on delivery for a small cost.

How Trans Capital can help

We have significant experience and expertise in arranging supply chain finance solutions and are able to advise you on the most appropriate and cost effective facility for your business. Learn more in this blog post and set up a confidential consultation about the best funding solution for your business.