What is Supply Chain Finance?

Supply Chain Finance (also known as SCF, payables, reverse factoring and supplier finance), is a cash flow solution which helps businesses free up working capital trapped in global supply chains. Supply Chain Finance has recently been defined as a much broader category of trade financing, encompassing all the financing opportunities across a supply chain. Notwithstanding, the product is still very much seen from a narrower perspective, where its key feature is that it is buyer/debtor driven. In such a case, a buyer approaches its financial provider for the establishment of a receivables discounting line for its suppliers to use and discount the invoices they issued to that buyer.

It is a solution designed to benefit both suppliers and buyers; suppliers get paid early and buyers can extend their payment terms. This solution allows businesses which import goods to unlock working capital as well as reduce the risk associated with buying goods in bulk and/or transporting them globally. SCF is generally defined as ‘an arrangement whereby a buyer agrees to approve his suppliers’ invoices for financing by a bank or other financier’.

The term Supply Chain Finance (SCF) is often also referred to as

• Supplier Finance
• Payables finance
• Supplier payments
• Approved payables finance
• Reverse factoring
• Confirming

Given that there are no ICC rules for SCF (like there are for Letter of Credit or Incoterms), it’s often up to each provider to decide what they call it.

Despite the publishing of the ‘Standard Definitions for Techniques of Supply Chain Finance‘ by the International Chamber of Commerce in 2016, the definition is not yet widely adopted and providers of SCF often use various terms to describe their product offerings.

Receivables finance on the other hand, is well defined as ‘the purchasing of receivables or invoices from a seller, with or without recourse’.

In order to address some of the common issues and misunderstandings around SCF, we have put together this short guide.

Diagram: How does Supply Chain Finance work?

How can Supply Chain Finance benefit my business?

SCF is a very efficient way to underpin the stability of a Buyer’s supply chain and market reach vis-a-vis its suppliers, allowing it to benefit from better credit terms and streamlined invoice payment procedures (supply chain finance tends to be made available through online platforms). It is also very beneficial to suppliers, as it allows them to shorten their receivables cycle and therefore reinvest their operational cash-flow at a faster pace. The advantages also tend to include financing in better terms for both parties, as suppliers don’t need to take out financing under their own credit lines and may benefit from their clients’ access to credit at lower rates, and buyers may get credit from their suppliers at a lower cost than that of taking out a loan.

Benefits to buyers/ importers

• Buyers can maintain a healthy balance sheet
• Buyers maintain a good relationship with suppliers
• Promotes competition/ diversity in suppliers
• Allows buyers to make purchases in bulk to save costs
• Buyers can work with complex end-to-end supply chains
• SCF doesn’t disturb existing bank relationships or overdrafts

Benefits to suppliers/ exporters

• Suppliers can get paid earlier than their usual 30-day credit terms
• Little financial risk – insurance is sorted through a supply chain financier
• Doesn’t cost the supplier any extra
• Allows supplier to have the cashflow to work on numerous deals simultaneously
• Helps provide liquidity and reduces financing costs

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