Supply Chain Finance

Ease the strain on your business’ cashflow and find out more about your supply chain finance options with Savvy.

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, updated on July 26th, 2023       

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What is supply chain finance and how does it work?

Supply chain finance (otherwise known as reverse factoring or supplier financing) is a type of business financing involving three parties: you, your supplier and your financier. It’s different to standard business loans in the way it’s structured, as it doesn’t simply involve you applying to a financier and paying them back directly over a period which suits you. Instead, the supply chain finance process looks like this:

  • Your business purchases product (goods or services) from your supplier
  • Your supplier signs off on the purchase and sends the required product to you, alongside an invoice
  • You sign off on the invoice and pledge to repay the amount directly to the financier by its due date
  • Your supplier sells the invoice to the financier, who pays it immediately at a discounted rate
  • You pay the full amount to the financier over your repayment period prior to its due date

The discounted rate your supplier receives is the full amount with a small portion taken out to cover the financier’s service fees. However, you’ll find that as a borrower, you’re likely to only need to pay a small fee as part of your repayments, which offsets the discount your supplier receives.

The primary reason this type of financing is sought by businesses is to maintain or improve their available working capital, with your business paying less in the short term and your supplier receiving the required funds immediately.

How do I choose which supply chain finance deal is best for me?

There are several key areas you should look to when considering your supply chain finance options. While there isn’t the same wealth of offers in the market as there may be for other business finance products, it’s still worth keeping these factors in mind when selecting your supplier financing deal:

Fees and costs

It’s important to consider the cost of the financing deal to your business. Although it may only be a one-off fee, you should take this charge into account, as any areas in which you can save should be seen as valuable opportunities when running a business. Some lenders will charge more than others, so keep this in mind when considering your options.

Payment term

Perhaps the most important factor in the comparison process is the invoice repayment periods allowed by financiers. Without a financier, there will likely be a hard deadline of 30 days to repay your supplier, but this isn’t the case when going through supply chain finance. While terms may vary, most will allow you to take up to 90 days to complete your payment, with others offering repayment periods up to 180 days.

International currencies

If your supplier is based overseas, it’s crucial to consider currency exchanges when operating through a supply chain finance agreement. In this position, you should prioritise financiers who can pay overseas suppliers in their native currency. Not all financiers will offer a full range of international currencies, so you should compare different options to find the one for you.

Repayment flexibility

Finally, you should also look to institutions who won’t charge you any fees or penalties for paying your invoice in full early. Businesses should be allowed to pay their financier ahead of schedule if they can come up with the funds before the invoice due date.

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The benefits and drawbacks of supply chain finance

PROS

Immediate payment for suppliers

Suppliers can receive their funds almost immediately after selling their product, boosting their cashflow straight away.

Longer repayment periods for buyers

Businesses who can’t quite afford to comfortably turn around an invoice in a short period can take a longer time to do so.

No security required

This type of finance is unsecured, so you won’t need to put up any assets, either personal or commercial, as collateral for the loan.

CONS

Charged for service

Supply chain financing doesn’t come for free, so you’ll end up paying more for your product than you would’ve otherwise.

Extending debt terms

If you’re looking to pay your invoice within 30 days, you may be unnecessarily extending your term in debt and costing your business money.

Frequently asked supply chain finance questions

Is supply chain finance different to invoice finance?

Yes – there are several key differences between supply chain finance and invoice finance. Firstly, while the former option pays your supplier in full upfront (minus a fee), invoice financing will only pay 70% to 90% of the value of the invoice upfront on average, with the rest of the invoice minus fees being sent through upon the payment of the invoice. Additionally, while supply chain finance usually comes with one small fee, invoice financing has several which are charged. Finally, the supplier is paid regardless of whether you repay the lender, which doesn’t occur with invoice finance.

Are there other business loan options for financing goods and services?

Yes – you can simply look to take out a standard unsecured business loan to pay for any business expenses, not just inventory from suppliers. This type of finance is more flexible in how it can be repaid, with amounts from $5,000 up to $500,000 available to be repaid over periods from three months to five years. If you need other costs covered across your business also, a business loan may be the option you’re looking for.

What types of businesses can take out supply chain finance?

This type of finance is suitable for any situation where a business is given invoices by its supplier when purchasing stock or services. Whether you’re a small café business buying produce from a local seller or a large IT business importing parts from overseas, supply chain finance is an option which can work for you.

Can suppliers choose to defer their payments?

In some cases, yes – you may find, as a supplier in a supply chain finance agreement, that you’re given the option to not only be paid upfront at a small cost but also to have the amount deferred for little to no discount. Not all lenders offer this, so if that’s something you’d prefer to do, it’s important you have a say when establishing which financier to choose with your buyer.

Is the amount of finance tied to the value of my invoice?

Yes – supply chain finance is designed to cover the cost of your invoice, meaning you can only really finance whatever you buy from suppliers under this type of arrangement.

How is supply chain finance conducted?

It can be conducted 100% online between you, your supplier and your financier, like other online business loans. Lenders make it easy nowadays to complete the supplier financing process from the comfort of your home or office. In most cases, financiers have developed platforms specially designed for suppliers to send invoices directly through to them, after which they can approve multiple at a time and help the supplier keep track of those which are and aren’t approved.

Do I need to pay a deposit?

No – you won’t need to pay a deposit. This type of finance doesn’t require any upfront payment, with financiers funding 100% of the invoice minus their fee.

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