Supply Chain Finance

Over half of UK SMEs report that poor cash flow is their biggest challenge. A common issue is slow payment for goods or services delivered. As more global trade is dominated by large corporations, suppliers often have to accept extended payment terms, making the situation unlikely to improve. Fortunately, there is a solution for those looking to ease cashflow challenges: supply chain finance. This short-term, unsecured lending option offers a win-win for all parties involved. Suppliers get paid faster and save on fees, while buyers protect their working capital and maintain strong relationships with their suppliers. Supply chain financing turns everyone into a cash flow king or queen.

​

What is Supply Chain Finance?

​

Supply chain finance provides unsecured cash advances to suppliers, allowing them to be paid earlier than the buyer's payment terms would usually allow. Also referred to as ‘supplier finance,’ it is distinct from traditional factoring or invoice financing because it benefits both the buyer and seller. The buyer can extend payment terms while the supplier receives early payment. As the buyer’s credit rating is used to secure the financing, which is often stronger than the supplier’s, the fees for early payment are typically lower than other financing options like factoring. Additionally, the buyer does not incur any fees in the process.

​

How Does Supply Chain Finance Work?

​

Supply chain finance is a collaborative effort between the supplier, buyer, and lender, with the buyer's credit strength serving as the foundation. Because large buyers are more likely to honour invoices, lenders are willing to provide cash advances to suppliers against the value of those invoices. The supplier receives almost the full amount of the invoice upfront (minus a small fee), once the buyer approves the invoice for payment. When the payment is due, the buyer settles the invoice with the lender.

​

Here’s how it works step-by-step:

​

1. The supplier issues an invoice to the buyer.

2. The buyer confirms the invoice has been approved to the lender.

3. The supplier receives the full invoice value minus a small fee.

4. The buyer pays the lender when the payment is due.

​

Benefits of Supply Chain Finance

​

For Suppliers: Supply chain finance is cashflow positive, allowing suppliers to receive almost the full invoice amount soon after the invoice is approved, rather than waiting weeks or months for payment.

For Buyers: Buyers can extend the payment period, giving them more time to settle their invoices without tapping into their working capital.

​

Disadvantages of Supply Chain Finance

​

While supply chain finance has clear advantages, it also has some potential downsides:

​

• Buyer Credit Risk: The financing relies on the buyer’s creditworthiness. If the buyer’s credit score is weak or they experience financial difficulties, the transaction may not proceed.

• Extended Payment Terms: Buyers may push for longer payment terms (e.g., 120 days or more), which could increase the fees for the supplier.

​

Example of Supply Chain Finance in Action

​

ABC Manufacturing, a small business, provides £1 million worth of components to Stela Motors, a large corporation. Stela Motors typically has 60-day payment terms, but ABC Manufacturing must pay £650,000 for raw materials within 30 days, creating a cashflow gap.

​

Stela Motors offers ABC Manufacturing the option of supply chain finance, allowing ABC Manufacturing to receive the £1 million upfront, minus a small fee, while Global Motors extends their payment terms to 90 days. This arrangement avoids ABC Manufacturing's cashflow crunch and allows Stela Motors to manage its working capital more effectively.

​

Cost of Supply Chain Finance

​

Because supply chain finance is based on the buyer’s credit strength, fees for the supplier are typically lower than other forms of financing, like factoring. The two main cost factors are:

​

• The amount financed.

• The time the lender must wait to be repaid.

​

Blockchain in Supply Chain Finance

​

Blockchain technology is being explored as a solution to enhance transparency and security in supply chain finance. A blockchain is a digital ledger of transactions, making it easier to track and verify all aspects of a deal. While still in its early stages, blockchain could offer significant advantages for supply chain finance:

​

• Greater Transparency: By creating an immutable record of transactions, blockchain could give lenders greater confidence in the deal and increase access to finance.

• Smart Contracts: Blockchain could enable self-executing contracts that automatically trigger payments, reducing costs and streamlining processes.

• Ethical and Sustainable Supply Chains: Blockchain can trace the origin of products and raw materials, promoting higher sustainability and ethical practices.

​

Difference Between Trade Finance and Supply Chain Finance

​

Both trade finance and supply chain finance facilitate transactions in the supply chain, but they are distinct:

​

• Trade Finance: A broad term that includes various financing options such as letters of credit and bank guarantees. It is typically used when the buyer and supplier do not know each other well, relying on the security of the goods rather than the buyer’s creditworthiness.

• Supply Chain Finance: A more recent solution that depends on the buyer’s credit strength. It is typically used between established trading partners.

​

Supply Chain Finance vs. Factoring

​

Unlike factoring, where a supplier sells invoices to a lender and receives an advance of up to 80% of the invoice value, supply chain finance allows the supplier to receive the full invoice value upfront. The buyer plays a central role in securing the transaction with their credit rating, while the supplier benefits from quicker payment and lower costs.

​

Dynamic Discounting vs. Supply Chain Finance

​

Both dynamic discounting and supply chain finance allow buyers to help their suppliers get paid early, but they operate differently:

​

• Supply Chain Finance: Uses external financing, with the buyer’s credit securing the loan. The supplier pays a small fee for early payment, but has no control over which invoices are paid early.

• Dynamic Discounting: Uses the buyer’s surplus cash to offer early payments. The supplier has more control, deciding which invoices are paid early and what fees they will incur based on how soon they want payment.

​

Sustainable Supply Chain Finance

​

Sustainable supply chain finance focuses on supporting ethical and environmentally responsible trade practices. Suppliers that can prove sustainable operations may receive preferential financing terms, which helps them get paid faster and at lower costs. For buyers, having a sustainable supply chain can also be a powerful marketing tool, differentiating them from competitors.

​

Unsecured Supply Chain Finance

​

Unsecured supply chain finance means that no physical assets or invoices are used as collateral. The transaction relies solely on the buyer’s credit strength to secure the financing, making it a short-term, unsecured lending solution.

​

How to Apply

​

Whether you’re a buyer or supplier, cashflow management is crucial to business success. Supply chain finance can help you get paid sooner or extend your payment terms. Register with Monetae to explore supply chain financing options and learn how to optimise your working capital.