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Supply Chain Finance | Everything You Need to Know
Supply chain finance is gaining traction as a smart solution for businesses looking to strengthen supplier relationships and keep operations running smoothly.
Written by: Sam Hodgson
This niche financial solution can provide a means to pay your invoices early, mitigate invoice payment delays, and build a great relationship with your suppliers. After all, who doesn’t want their invoices paid instantly?
Managing cash flow is an essential aspect of any business. But, it may be rare that you truly consider your supplier’s cash flow. After all, someone else’s business is their business, right? By offering early invoice payments, companies can help ease the financial strain on suppliers, improve cash flow, and build stronger partnerships.
The benefits are clear: faster payments, smoother supply chains, and better negotiating power for buyers. As more businesses explore this option, understanding how supply chain finance works and how it differs from traditional invoice finance is becoming increasingly important.
- Supply chain finance is a funding option that enables you to pay suppliers early.
- The lender pays suppliers upfront, and you repay the loan over the agreed terms.
- Unlike invoice factoring, supply chain finance shifts credit responsibility to the buyer, not the supplier.
Contents
How Does Supply Chain Finance Work?
The Pros and Cons of Supply Chain Finance
The Difference Between Supply Chain Finance and Invoice Finance
How to Get Supply Chain Finance
How Does Supply Chain Finance Work?
Supply chain finance is a product in which a finance company facilitates the early payment of an invoice by lending money to the buyer.
Typically set up as a revolving line of credit facility for the buyer, it can keep you in exceptional standing with multiple suppliers, greatly improving your business relationships.
The system is simple. Once an invoice has been issued, it can be immediately presented to the supply chain finance company, which will pay the invoice minus their fee.
The buyer is free to pay the full invoice amount to the finance company according to the standard invoice payment terms.
Interested in securing supply chain finance or any other type of business finance? Book a no-obligation chat about your options with one of our expert brokers.
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
The Pros and Cons of Supply Chain Finance
PRO 1: The Speed
Getting your invoices paid early can be essential for companies looking to reduce pressure on their cashflow. Rather than waiting 30 days or longer for the cash to become available, it can be cleared within a day of the invoice being issued.
PRO 2: The Relationship
Supply chain finance is typically offered by the buyer to the supplier as an option. There is no obligation for its use, so the supplier can choose to opt in or out as they see fit.
Being able to provide this rapid payment option only improves the supplier/customer relationship, showing understanding and a willingness to help.
PRO 3: The Credit Responsibility
For the supplier, one huge pro is that the onus of the loan is on the buyer, not the supplier.
Any credit checks or other obligations fall on the buyer, meaning they are available to suppliers suffering from poor business credit history or other issues that prevent them from obtaining their financial support.
PRO 4: Linking the Chain
Often, suppliers are part of an ongoing supplier-buyer chain, meaning they have financial responsibilities to cover. Offering supply chain finance ensures that they remain a stable and flexible part of that chain and not a potential block in financial throughput.
PRO 5: Negotiation Strength
Buyers who are willing and able to offer supply chain finance often find they have a stronger negotiating position with their suppliers and may be able to secure more beneficial deals thanks to the inclusion of this financial support.
PRO 6: Administration
Buyers with an ongoing supply chain finance arrangement can easily administer multiple suppliers with a single centralised finance system.
CON 1: The Fee
Like any financial product, supply chain finance does incur a charge. Typically, this is between 10% and 20% of the invoice total.
As the supplier is the company benefitting the most from the arrangement, they are responsible for accepting the cost of the fee.
CON 2: Invoice Limits
Supply chain finance is set up with credit limits and may not be flexible with late changes to the invoice totals.
CON 3: System Integration
Efficient supply chain finance requires IT system integration with the buyer, which can lead to administrative difficulties, especially in the early days of set-up.
The Difference Between Supply Chain Finance and Invoice Finance
Supply chain finance is sometimes called “reverse factoring,” as it is a clear mirror to invoice factoring, one form of invoice finance.
With invoice factoring, suppliers can sell their outstanding invoices to a factoring company to facilitate early payment. The difference with supply chain finance is that the business makes the credit application and holds the responsibility for it. With invoice factoring, the responsible company is the supplier, while with supply chain finance, the responsible business is the buyer.
Similarly, invoice factoring offers a similar solution for buyers who may be under more financial strain, where the supplier can show more financial liquidity.
Read these related guides for more information on invoice factoring, factoring companies, and invoice discounting.
How to Get Supply Chain Finance
At Clifton Private Finance, we have a team of dedicated finance and loan specialists who will find the perfect loan to suit your business needs. Our advisors will examine the entire market and walk you through the options available to you to get the best interest rates and lowest fees — as well as a funding solution that suits your requirements.
To see what we can do for you, call us on 0203 900 4322 or book a free consultation below.
