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Supply chain financing, also known as supply chain factoring or reverse factoring, involves selling a supplier’s invoices to a third party, such as a bank or a financing company.
A successful SCF transaction helps optimize working capital. It allows buyers to pay later while suppliers receive their funds sooner, giving both sides more flexibility in how they use their funds. This process supports a stronger, healthier supply chain and builds better relationships between buyers and suppliers.
Unlike factoring, where the supplier sells invoices to receive payment sooner, the buyer sets up supply chain financing through a platform that lets suppliers choose which invoices they want paid early. Since the process is buyer-driven, suppliers’ fees for SCF are often lower than those for factoring.
How Supply Chain Financing Works
Get the Funds You Need, When You Need Them
Here's how it works:
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Upload & Approve Invoices
Suppliers submit invoices to the buyer, who reviews and approves them for payment.
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Select Invoices to Monetize
Suppliers decide which approved invoices they want early payment for, giving them flexibility to match their cash flow needs.
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Receive Funds Quickly
Financing partners advance funds to suppliers, often within 24 to 48 hours. This allows businesses to cover operational costs or pursue new opportunities.
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Buyer Repayment
On the invoice due date, the financier collects payment directly from the buyer, completing the cycle and keeping cash flow steady across the supply chain.
Costs and Fees
Understanding the Price of Supply Chain Financing
Supply chain financing provides more affordable access to working capital compared to other unsecured financing options. The exact cost depends on factors like supplier terms, transaction volume, and lender agreements.
Before diving deeper, let’s compare supply chain financing vs. factoring and other financing options side-by-side. Most providers charge either a discount rate or interest on early payments, along with potential administrative fees for managing transactions and coordinating with suppliers. Transparent agreements make costs more predictable and help avoid surprises.
How Supply Chain Financing Are Structured
EXAMPLE 1
An electric parts manufacturer has a $10,000 invoice and opts to factor it instead of using supply chain financing. With an 85% advance rate, the company receives $8,500 upfront, while $1,500 is held in reserve.
The factor charges a 2.5% monthly fee ($219), capped at the reserve amount. Since this is a non-recourse agreement, the supplier is not responsible for any additional losses if the invoice isn’t paid.
If the invoice is collected in one month, the $219 fee is deducted from the reserve before the remaining $1,281 is released. If it takes seven months, the total fee still remains $219 because charges are capped and non-recourse protects the supplier from extra costs.
This arrangement gives the supplier immediate access to working capital while limiting exposure, avoiding the complications and confidentiality concerns sometimes associated with supply chain financing.
EXAMPLE 2
A supplier factors a $15,000 invoice with a 90% advance rate, receiving $13,500 upfront, while $1,500 is held in reserve.
The factor charges a 2% monthly fee ($300), capped at the reserve amount. This arrangement is non-recourse, so the supplier bears no additional risk if the invoice isn’t collected.
If the invoice is collected in two months, the $300 fee is deducted from the reserve before releasing the remaining $1,200. If the collection takes six months, the fee remains $300 because of the fee cap and non-recourse protection.
This approach allows the supplier to unlock immediate working capital to cover payroll, production costs, or new opportunities while minimizing risk and avoiding disclosure of sensitive information to buyers.
Hidden Fees and How To Avoid Them
When comparing supply chain factoring programs, look beyond the headline discount rate or interest charge. These additional costs that may not be obvious upfront but can significantly increase your overall expense:
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Supplier Enrollment and Setup Fees
Some providers charge fees for onboarding suppliers or setting up the financing platform. These can be one-time or recurring charges
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Transaction and Processing Fees
Each early payment or invoice transaction may include processing costs. While small per transaction, they can add up quickly with high invoice volumes.
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Minimum Usage or Commitment Fees
Certain programs require you to use the service for a set percentage of your supplier payments. Falling below that threshold can trigger extra charges.
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Administrative or Platform Fees
Ongoing account management, platform access, or reporting services may carry monthly or annual costs.
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Contract Length and Early Termination Penalties
Some agreements lock you into multi-year commitments. Exiting early can lead to steep penalties.
Practical Tips To Avoid Hidden Fees
Keep costs under control and maximize the value of your supply chain financing program with these strategies:
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Clarify All Fees Upfront
Request a detailed breakdown of every potential charge, including supplier onboarding, transaction processing, platform access, and early termination penalties.
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Work With a Transparent Provider
Choose a financing partner known for clear pricing, fair practices, and strong supplier relationships. Transparency reduces the risk of unexpected costs or disputes.
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Monitor Program Usage
Stay on top of how often you’re using the financing and whether you’re meeting minimum commitments. Careful tracking helps you avoid underutilization fees or extra charges tied to transaction volumes.
Why Your Business Needs Supply Chain Finance
Fuel Your Operations With Immediate Working Capital
If your business has a network of suppliers and buyers but faces cash flow gaps, SCF provides the capital to pay suppliers, manage inventory, and keep operations running smoothly without delays.
SCF can be a strategic financing solution that allows you to leverage your supply chain relationships to unlock cash earlier. Instead of waiting for extended payment terms, you gain immediate access to funds to reinvest in operations or take on new projects.
Best of all, supply chain finance grows with your business. As your supplier and buyer network expands, so does your access to working capital. Scale your operations without the unnecessary cash flow constraints and keep your business moving forward.
Industries That Benefit From Supply Chain Financing
Providing Cash Flow Solutions To Various Sectors
Here’s how supply chain factoring helps businesses across industries remain financially stable.
Freight Bill & Trucking Factoring
Staffing, Labor & Payroll Factoring
Manufacturing Financing
Agriculture & Food Production Factoring
Technology & IT Financing
Oil & Gas Financing
Which Model Fits Your Business Needs?
Supply chain financing and traditional bank loans both provide access to working capital. However, they differ significantly in speed, flexibility, and requirements.
Supply Chain Financing
Traditional Bank Loan
Extend payment terms while allowing suppliers to receive early payment through a financing provider. This model is built around the strength of your buyer-supplier relationships rather than solely your company’s credit.
Benefits of Supply Chain Financing
- Improves cash flow by extending payment terms without straining supplier relationships.
- Quicker access to working capital.
- Often available at lower costs due to reliance on the buyer’s credit rating.
- Strengthens supply chain resilience and stability.
Common Risks Associated With Supply Chain Financing
- May involve setup or platform fees that increase total costs.
- Works best with large, creditworthy buyers — smaller businesses may have limited access.
- Requires coordination with suppliers, which can create delays in implementation.
- Over-reliance on extended terms may mask underlying cash flow issues.
Receive a lump sum of cash upfront, which is often secured against your company’s assets or credit history. Repayment terms are structured over a set period with fixed interest.
Benefits of a Traditional Bank Loan
- Typically lower interest rates than many short-term financing options.
- Can provide larger amounts of capital for long-term projects.
- May help build business credit over time.
- The repayment schedule is predictable and structured.
Common Risks Associated With a Traditional Bank Loan
- Approval can be lengthy, often taking weeks or months.
- Requires strong credit history, collateral, or extensive financial documentation.
- Less flexibility; funds must be used according to loan terms.
Missed payments can impact credit and may trigger penalties or loan default.
Get Started Here
We are here to provide the best options for addressing cash flow challenges.
Before we can help, we need to ask a few simple questions. One of our customer service representatives will get in touch after we receive your information.
FAQs – Supply Chain Finance
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What is supply chain financing?
Supply chain financing (SCF) is a financing solution where suppliers can get paid early on approved invoices, while buyers can extend payment terms. A third-party financier provides the working capital, improving cash flow for both parties.
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How does the financing work?
Suppliers submit approved invoices to supply chain financing companies through a technology platform. The financier advances a portion of the invoice amount immediately. When the invoice is due, the buyer repays the financier.
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Who is responsible if the invoice isn’t paid?
Responsibility depends on the agreement. In most SCF arrangements, supply chain financing companies take on the risk of buyer default. Suppliers are typically protected from additional costs if the buyer fails to pay.
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Does using SCF affect my company’s financial standing?
Not at all. SCF is viewed as a smart cash flow management tool rather than a sign of financial weakness. It enables suppliers to access working capital quickly while maintaining good buyer relationships.
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Is SCF only for large companies?
No. While often used by large corporations, many SCF programs are available to small and medium-sized suppliers, especially those with creditworthy buyers.