Supply chain finance is often confused with receivables finance, trade finance or invoice finance. But while these types of funding are all designed to help businesses manage cashflow, there are important differences between them.
It’s a way for smaller businesses to benefit from the higher credit scores of their buyers, and for buyers to lengthen their payment terms. That might sound confusing — here’s how it works.
Large multinational companies are highly likely to honour invoices from suppliers. That means the suppliers that work with them can get 100% of the value advanced from a lender, minus a small fee, once the buyer has approved the invoice for payment — because at this stage, the risk of non-payment is very low.
A breakdown of supply chain funding
The supplier issues an invoice to the buyer.
The buyer confirms to the lender that the invoice has been approved for payment.
The supplier gets the value straight away (minus a small fee).
When payment is due, the buyer pays the lender.
In this way, the supplier's cash flow is stabilised because they get paid within a few days, rather than waiting for the standard ‘payment due’ date (which could be as long as 120 days).
Meanwhile, the buyer simultaneously benefits, because they have effectively extended their payment terms, but without negatively impacting their suppliers.
This is because the payment delay is taken on by the lender — so the supplier gets paid within a few days, but the buyer’s working capital is untouched until their extended payment terms are over.
Supply chain finance is mutually beneficial for both buyers and suppliers, because it helps both parties stabilise their cash flow.
Suppliers get similar benefits to invoice financing— they get paid within a few days rather than waiting for long payment terms.
Because supply chain funding is directly based on the buyer’s credit rating, the cost can be lower too.
Buyers can extend their payment terms, i.e. delay paying suppliers for longer than normal, but without putting pressure on their suppliers directly.
It’s the lender whose working capital is affected — leaving both the buyer’s and supplier’s working capital free to use for other business purposes.
Supply chain finance is a collaborative process — the lender helps both the buyer and the supplier, and all three parties have an arrangement together. That’s why supply chain finance is not the same as invoice finance, even if it might seem similar from the supplier’s point of view.
Smaller buyers that receive goods from suppliers can fund these transactions using trade finance, as long as they are financially strong and are working with creditworthy suppliers. This is typically done using Letters of Credit and/or cash upfront from large lenders that guarantee the payment to your supplier.