Leveraging Supply Chain Finance
The evolving supply chain finance sector is making it easier for suppliers and buyers to work out their own win-win financial arrangements.
In a business climate where optimizing cash flow, lengthening payment terms and preserving financial assets have become strategic imperatives for most companies, supply chain, or supplier, finance is gaining in popularity across the global supply chain. Through a “reverse factoring” process, this financing option finds suppliers “selling” their invoices to a bank or other entity at a discount, and then paying those invoices later while suppliers get paid earlier.
Rather than relying on the individual supplier’s credit, the middleman (usually a bank) deals directly with the buyer. A large, global manufacturer, for example, can use supply chain finance to pay its suppliers later, thus boosting its own working capital while holding onto its cash for a longer period of time.
In a best-case scenario, both supplier and buyer improve their own working capital while the middleman receives a fee for its services. And because the risk is transferred to one buyer (versus a group of buyers, as in the case of factoring), it tends to be a less expensive and less risky proposition. Through it all, the end game is to give suppliers access to beneficial financing options as a result of the buyer’s good credit rating.
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In a business climate where optimizing cash flow, lengthening payment terms and preserving financial assets have become strategic imperatives for most companies, supply chain, or supplier, finance is gaining in popularity across the global supply chain. Through a “reverse factoring” process, this financing option finds suppliers “selling” their invoices to a bank or other entity at a discount, and then paying those invoices later while suppliers get paid earlier.
Rather than relying on the individual supplier’s credit, the middleman (usually a bank) deals directly with the buyer. A large, global manufacturer, for example, can use supply chain finance to pay its suppliers later, thus boosting its own working capital while holding onto its cash for a longer period of time.
In a best-case scenario, both supplier and buyer improve their own working capital while the middleman receives a fee for its services. And because the risk is transferred to one buyer (versus a group of buyers, as in the case of factoring), it tends to be a less expensive and less risky proposition. Through it all, the end game is to give suppliers access to beneficial financing options as a result of the buyer’s good credit rating.
About the Author
Bridget McCrea, Editor Bridget McCrea is a Contributing Editor for Logistics Management based in Clearwater, Fla. She has covered the transportation and supply chain space since 1996 and has covered all aspects of the industry for Logistics Management and Supply Chain Management Review. She can be reached at [email protected], or on Twitter @BridgetMcCreaSubscribe to Supply Chain Management Review Magazine!
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