Supply chain finance is a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and suppliers involved in a transaction. In supply chain finance, a third-party financial institution pays suppliers on the buyers behalf, allowing suppliers to receive early payment on their invoices. This financing solution reduces the risk of supply chain disruption and enables both buyers and suppliers to optimize their working capital.
Key features of supply chain finance include:
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Buyer-led financing: Supply chain finance is initiated and handled by the buyer, who works with a third-party financial institution to pay suppliers quickly while providing the purchaser extended terms.
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Short-term credit: Supply chain finance provides short-term credit that optimizes working capital for both the buyers and the sellers.
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Payment assurance and risk mitigation: Supply chain finance offers payment assurance and risk mitigation to suppliers, who can access capital early at a lower cost than with other financing methods.
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Trigger-based financing: Each financial intervention in the supply chain is driven by an event or "trigger" in the physical supply chain, such as purchase orders, pre-shipment inspections, despatch/shipment, and invoices raised by the seller.
While supply chain finance is experiencing significant growth in demand, financial institutions are focused mainly on the large buyer side of the trade equation. However, the real supply chain finance opportunity extends to large suppliers too, in particular in terms of payment assurance and risk mitigation.
Overall, supply chain finance is a valuable tool in any companys working capital optimization arsenal, helping buyers to improve their working capital position while maintaining strong supplier relationships by involving a third-party factor to pay invoices early.
