Glossary detail

Supply Chain Finance

Supply Chain Finance is a generic term for any form of funding which provides capital support to a user at any stage during the entire supply chain from pre-order to delivery.

It is also a term for some specific products relating to Buyer-centric funding of open account business which use Factoring concepts and methods.

It is this latter use that we describe here, as it is the one more closely associated with the world of open account. Users of these services tend to be large, highly credit-rated Buyers who want to strengthen and standardize their purchasing operations, to plan and control their cash flows. Providers tend to be banks and specialist finance houses.

The Buyer will identify those of its Suppliers that it wishes to enroll within the arrangement; such Suppliers who choose to accept will generally be brought into the program (on-boarded) by the financier. 

On completion of Supply of goods or services, the Suppliers will send their invoices to the Buyer as per their normal business process. The Buyer will then assess, confirm and approve such invoices for payment. The financier will then offer the Suppliers a choice to receive immediate payment (at a discount) or to wait until maturity date to be paid in full. 

The advantage for the Supplier is that they can have access to instant payment, and that the cost of such funds will usually be lower than that they would be able to obtain themselves based on their own credit ratings and status. 

Such payments are made on a non-recourse basis, so it is important to have a reliable confirmation and an agreement that any subsequent disputes or deductions must be dealt with outside the process. 

It is important to realise that although the product solution uses many of the same principles and processes as standard factoring, the profile is very different, with all the financial risk being focused in the Buyer rather than across the individual Suppliers. Accordingly, this is a solution that requires appropriate targeting to selected financially sound and well-established Buyers.

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