Supply chains can grow across the globe. UK-based buyers, for example, can gain stock from numerous different suppliers based in countries around the world. In such circumstances, businesses are faced with serious pressure to keep up their working capital, with invoices trapped in these supply chains.
Supply Chain Finance, also known as reverse factoring, is a facility that focuses on maximising a healthy cash flow for suppliers when they are dealing with larger customers, often with extended payment terms.
Despite the name, the actual product used for supply chain finance is Invoice Finance. This can be either a full ledger facility with a 1-2 year agreement or a Selective Invoice Finance product where the invoice to be funded can be chosen by the supplier and used as and when required.
The funder and the lender have a relationship that is instigated by the buyer to ensure that their suppliers are receiving the funding they need to maintain and manage their cashflow, whilst awaiting the payment of their outstanding invoice. The funder is comforted by the strength of the buyer’s business and can finance the supplier’s invoices with confidence. The buyer often provides a guarantee on payment or a Promissory Note to the funder at this point.
Supply Chain Finance has increased in popularity over recent years as buyers have sought to extend their payment terms without damaging the financial health of their Suppliers. It has created more of a sense of partnership between the parties giving buyers confidence in the sustainability of their suppliers business models and at the same time enabling suppliers to get on with meeting production deadlines.