Supply Chain Finance – A Closer Look at its Operations

By creating a harmonious relationship between suppliers, purchasers, and financiers, Supply Chain Finance (SCF) subtly transforms the dynamics of trade. This strategic partnership synchronizes financial flows for buyers while accelerating payments to suppliers, enabling growth. Exploring its complex procedures reveals a wealth of advantages that improve liquidity while efficiently organizing financial agreements. Let us discuss how the Supply Chain Finance program works in this blog.

A Brief Introduction to Supply Chain Finance Program – What Is It?

A deal between the supplier, buyer, and a factor or financier in which the supplier receives payment in advance for the receivables benefits both the buyer and the supplier, which is known as supply chain finance (SCF) or reverse factoring.

The buyer asks the bank or financial institution to make payments to the supplier directly during the process, which is very advantageous to the supplier. The buyer keeps tabs on the cash outflow by deferring payment to the banking institution. Therefore, the supplier’s time to collect money is shortened.

Process

1. A financial agreement between a buyer and a seller known as supply chain finance is one in which the buyer agrees to pay the seller right away and the financier later.
2. An agreement is made between the buyer, the supplier, and the financier.
3. Transactions between the seller and buyer occur, and the seller sends the buyer invoices.
4. The purchaser must upload the invoices to the supply chain financier’s online system.
5. The invoices are approved by the seller and given to them by the financier.
6. The amount paid exceeds the financing fees for settlement before the due date and falls short of the invoice value.
7. After approaching the buyer, the financier collects the payment on the actual due date for the invoices.
8. The financing costs may be borne by one party or both, based on the nature of the supply chain finance program.

In most cases, the buyer will want to defer the payment for a more extended period in order to postpone the cash outflow so that it may be utilized in the business. However, the seller always wants to get paid on time so that they may plan their business operations without worrying about running out of money or wasting time waiting for the buyer to pay.

Also Read: Optimizing Working Capital with Supply Chain Finance Program

To solve this problem, the customer and supplier come to an arrangement with a third-party lender who would use the invoices generated and give the supplier credit. The third-party lender receives the money from the buyer once the payments are due. As a result, the customer keeps his payment window open while giving the supplier quick access to his receivables. Supply chain finance makes it possible for both sides to achieve their goals without affecting the other’s financial position.

Delving Into the Benefits of Supply Chain Finance

The following explains some advantages of the supply chain finance process flow.

• Increasing the credit line and making the cash available to the supplier benefits both the customer and the supplier.
• It strengthens the bond between sellers and buyers and creates the path for additional transactions.
• Increases the buyer’s creditworthiness and gives the seller a liquidity edge.
• The cost of financing is relatively low in supply chain finance, in contrast to the involvement of banks, which carries a higher rate.

Exploring the Limitations of Supply Chain Finance Program

The process flow for supply chain finance has some restrictions as well.

• Engaging in business with a 3rd party involves risk because the financier or lender is not a bank. The buyer can fail to pay the supplier on time or follow the conditions of the contract.
• It serves as a means of paying for illegal goods. There are significant supply chain financing risks when the customer or the seller uses the delay in payment to conduct transactions for unlawful items.
• Only goods with a readily accessible market worth may be financed using supply chain finance. It is impossible to acquire a financer to pay if the products are not prepared to be sold. The person providing the funds won’t agree to a contract to pay for goods that aren’t ready to sell.

Wrap up

Thus, Supply Chain Finance is a strategic alliance that streamlines financial flows and propels growth by expediting supplier payments while optimizing buyer cash outflows. Contact Triterras, a leading trade finance fintech, if you wish to improve your financial stability and get the best Supply Chain Finance assistance.