Supply Chain Finance

Name: Supply Chain Finance
Creator: Savvy
Published: 2022-01-07T10:45:59+10:30

Home > Business Loans > Supply Chain Finance

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Written by , updated on July 26th, 2023

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.

Types of business loan

Unsecured business loans

The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.

Secured business loans

If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.

Small business loans

Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.

Low doc business loans

Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.

Lines of credit

A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.

Invoice finance

Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.

Equipment loans

A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.

Supply chain finance

With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.

Inventory finance

Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.

Overdraft facility

An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.

Cash flow loans

You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.

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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.