A Comprehensive Guide To Supply Chain Finance

jaro education
18, January 2024
9:00 am

Supply chain finance (SCF) is a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction. SCF allows suppliers to use their accounts receivable as collateral, which gives them early access to payment of the invoices issued by buyers. Meanwhile, buyers can prolong supplier delivery time and improve liquidity while benefiting from using financing tools like syndicated loans or securitization on discounting credit balances to reduce financing costs. SCF can offset the risks and costs of trading activities, such as currency fluctuations, delays in making payments, and quarrels over overpayment settlement.

SCF is by no means an innovative concept, but it has gained new life in the face of rapidly increasing complexity and instability in global supply chains over recent years. For instance, the COVID-19 pandemic has revealed how weak and vulnerable many supply chains can be. More flexibility and resilience should be more important in designing a buying model. In the current business environment, with ecology and sustainability coming to the forefront, creating more value and efficiency in their operations is a crucial consideration for suppliers. And this is where SCF can help.

In this blog, you will explore the benefits, features, and types of SCF. Plus, will learn about the challenges and opportunities for its adoption and implementation. Besides that, it will also introduce an Executive Certificate Program In Supply Chain Analytics and Management, offered by IIM Mumbai (NITIE) in collaboration with Jaro Education, that can help you learn the latest concepts, tools, and techniques of supply chain management and analytics.

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How Does Supply Chain Finance Work?

Supply Chain Finance works best when the buyer has a better credit rating than the supplier and can thus access capital from a bank or other financial provider at a lower cost. This advantage lets the buyer negotiate better terms from the supplier, such as extended payment schedules. Meanwhile, the supplier can unload its products more quickly and receive immediate payment from the intermediary financing body.

A typical SCF transaction involves the following steps:

- The buyer places an order with the supplier.
- The supplier delivers the goods or services and sends an invoice to the buyer.
- The buyer approves the invoice and sends it to the financier, who verifies it and offers to pay the supplier early at a discount.
- The supplier can accept the early payment offer or wait until the due date.
- The financier pays the supplier according to the agreed terms.
- The buyer pays the financier on the due date.

What Are The Benefits Of Supply Chain Finance?

SCF offers many benefits to both buyers and suppliers, such as:

Improved cash flow

Buyers can extend their payment terms and suppliers receive early payments with SCF, which enhances their cash conversion cycle and frees up cash for other purposes.

Reduced financing costs

SCF allows suppliers to access financing at lower rates than they could obtain independently, based on the buyer’s creditworthiness. SCF also reduces the need for suppliers to use other forms of funding, such as overdrafts, loans, or factoring.

Increased profitability

By utilizing SCF, buyers and suppliers can optimize their working capital and reduce their inventory and financing costs, which increases their profit margins and return on capital employed.

Enhanced supply chain stability

The relationship and trust between buyers and suppliers is strengthened by SCF, reducing the risk of payment delays, disputes, and defaults. SCF also helps suppliers to improve their liquidity and solvency, which reduces the risk of supply chain disruptions and insolvencies.