The process of supply chain finance is a simple one. It takes proceedings when the buyer enters into the agreement of supply chain finance with any third-party financer. After this, the supplier invoices typically the buyer. The buyer, however, approves the following invoices of the supplier. Later the supply chain financer makes the payment to the supplier as soon as the invoice gets approved. After this, the buyer pays back the financier after 120 days as when both parties agree. It means that the supplier need not have to wait for the full payment term before getting the money. It, in turn, helps the supplier to pay for their supplies.
In other words, the power of each party is uneven in any transaction. For instance, a buyer, including a big supermarket chain, can put the smaller suppliers at risk of cash flow shortage after dictating longer payment terms. The small buyers may struggle with the liquidity while taking the risk of letting unpaid invoices fall under overdue. It can impact the entire process of the supply chain. Therefore the large, medium and small enterprises are alike.
The global trading relationship and the complex supply chain can sometimes exacerbate the problems. For example, the time delay with late payments and cross border transactions can cause a domino effect across the entire supply chain. On the other hand, supply chain finance can somehow strengthen the entire chain for both the suppliers and buyers.
Besides, supply chain finance helps both the buyers and the suppliers.
The buyers can save money while taking advantage of any early payment discounts. They can maintain a good relationship with their suppliers. It somehow helps to strengthen the ability of the supply chain of the buyer.
Along with that, the buyer can trade as usual with the available cash that they have. The facility of supply chain finance gets considered to be an off-balance sheet funding source. It means that it does not affect the ability of the user to access any other traditional funding sources, including bank loans.
However, in the case of the suppliers, they can get earlier payments while improving the balance sheet. One can do it by lowering the account receivables. Hence, in other words, supply chain finance offers an advantage to both the buyers and the suppliers. It helps to reduce the risk along the whole chain.
What is supply chain?
Once you understand the definition of what is supply chain, you will see that it offers the suppliers and buyers a good amount of flexibility with the payments. The suppliers and the buyers need the availability of liquidity in the chain.
The buyers can, however, extend the payment term with the help of supply chain finance. It offers them the best flexibility. One can do this without even hurting the cash flow of the suppliers. Everyone somehow tends to get concerned about the financial health of the suppliers. Their medium and small suppliers are primarily at the risk of becoming bankrupt. Hence with the help of the supply chain finance, the suppliers get more choices about the payment type.
However, the suppliers can also get a lower rate of interest. For example, if the supplier likes to have a small pharmaceutical startup, they may not qualify for a loan with a lower interest rate. But with the supply chain finance, they can get easy access to this. The supplier need not have to use their fund during the whole process of financing. They even do not have to finance with the help of their working capital.
Supply chain finance can strengthen the relationship between the buyer and the supplier. It brings them much closer. The buyer needs to work with their suppliers to ensure the quality products that they need. Therefore supply chain finance plays a significant role in growing your business.