How does supply chain finance work?
Supplier finance involves three parties. The buyer is the company purchasing products or services from the supplier. The financial institution (sometimes called the investor) finances the transaction.
In a typical transaction:
- The buyer orders goods or services from the supplier.
- The supplier fulfils the order and invoices the buyer for the transaction amount.
- The buyer approves the invoice from the supplier and confirms it will pay the financial institution/investor by the invoice due date, which can be longer than the typical 30 day payment terms..
- The supplier then sells the invoice to the financial institution at a predetermined discount rate and receives payment immediately.
- The buyer pays the amount owed to the financial institution/investor by the invoice due date.
In return for receiving payment for invoices immediately, the supplier receives less than the total invoice amount, which is called the discount rate.
Supply chain finance involves the use of an online platform and a financial institution or investor who settles the invoices issued by suppliers before their maturity date and at a financing cost lower than other options available to the supplier. Part of the process includes checking the credit ratings of buyers. These need to be high in order to be approved for the supply chain finance facility.
Through the platform, the supplier sends invoices to the buyer who approves them. The supplier can log into the supply chain finance platform to view the approved invoices. Depending on the financial situation, the supplier can wait for the invoice to be paid into their bank account as per the payment terms or can sell the invoice to a funder in exchange for quicker payment.
How does it differ from invoice finance or factoring?
With invoice finance and factoring, the financial institution will consider individual invoices or batches of invoices and provide immediate funds based on their value. The amount provided upfront is usually around 80 per cent of the total value of the invoices. The balance, minus fees and interest, is paid to the supplier when the invoices are paid. In addition, invoice finance has additional costs, including due diligence fees and services fees. With supply chain finance, the supplier only pays a small discount (interest) in order to get paid early. Another way that supply chain finance is different is that the supplier will get paid even if the buyer does not pay the invoice in the future. This is not the case with invoice finance and invoice factoring. Find out more about the pros and cons of invoice finance.
What are the benefits of supply chain finance for buyers and sellers?
- Longer supplier payment terms
- Improved cash flow
- Ability to optimise working capital
- Improvement of balance sheet with off-balance sheet finance
- Improved cash flow
- Quick access to cash at better rates
- Stronger relationships with buyers
- Better invoice visibility.
What types of businesses use supply chain finance?
Supply chain finance is suitable for business-to-business transactions where buyers are given invoice payment terms. It’s not limited to certain industries, and includes buyers and suppliers in consumer goods wholesalers and distributors, communications and IT service providers, energy utilities and mining, industrial manufacturing, transport and logistics, and professional services.
An alternative to supplier finance
Moula Pay is a smarter way for both suppliers and buyers to manage supply chain finance.
Suppliers can offer their buyers Moula Pay as a payment method on invoices. When a buyer pays the invoice, the supplier gets paid upfront. In the meantime, the buyer enjoys up to 12 months to pay, with the first 3 months interest and repayment-free.
Learn more about how your business can pay smarter using Moula Pay.