Supplier Finance – Adding Value Throughout the Supply Chain
April 16th, 2021
Businesses are increasing their global reach and expanding their operations, crossing international borders, and as a result, the same goes for supply chains.
At the same time, these businesses are focusing on managing inventory and protecting working capital. With global procurement now a reality for many, balance sheets face increased pressure, which has not been made any easier due to the rippling effect of Covid. This is where supplier finance plays a critical yet often overlooked role.
Supplier finance is certainly not new — it is the financing of an invoice once the buyer has accepted to pay and can be used at any number of stages in the value chain. At its core lies a simple transaction, which begins with a supplier sending an invoice to a buyer.
Once the buyer has approved the invoice, it has, in effect, created a payment obligation. At this point, the supplier can sell that invoice to a financier. For the supplier, it means they can get funds within days – albeit at a lower cost – rather than waiting for up to 90 days while the buyer can pay on pre-existing payment terms.
The process does not start and end at just that. Supplier finance can enter the extended supply chain at any point, for example:
- Purchase orders: increasingly, some finance organisations use buyer Master Purchase Orders for working capital facilities for key suppliers.
- Work in progress payments: as part of a Master Purchase Order agreement.
- Vendor-managed inventory, continuous replenishment, or supplier-managed inventory: payment is triggered once goods leave a warehouse.
- Inventory in transit financing: where monies are released when goods are transported.
- Proof of Delivery via Forwarder Cargo Receipt (FCR): as more cargo is exported with electronic messages such as FCRs and advanced shipment notices, there will be more opportunities to develop liquidity off these.
For many, the traditional post-shipment finance model of invoice financing still dominates – a model where a finance company provides the supplier early payment as financing from buyer accepted invoices.
The success of supplier finance is, of course, based on visibility and invoice data integrity. As we can see, the market for supplier finance is seeing some innovation with the ability of funding at many stages throughout the supply chain.