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Supply Chain Financing

With supply chain financing (SCF), suppliers sell their invoices at a discount to banks or other financial service providers, like factoring companies. Unlike factoring—in which the sale is initiated by the supplier—supply chain financing is initiated by the buyer. Supply chain facilities may come with reporting requirements and covenants that adversely affect the supplier’s business.
  • Risk is based on the buyer’s credit profile
  • Supply chain financing is also known as reverse factoring

What is supply chain financing?

Supply chain financing (SCF) – also known as reverse factoring – is a sale of a supplier’s invoices to a third party, such as a bank or a financing company.

The outcome of a successful SCF transaction is working capital optimization. By postponing the payment (in buyer’s case) and accelerating it (in the supplier’s), both parties can use the funds for something else. This ensures the health of a supply chain and strengthens the buyer-supplier relationship.

Unlike factoring—in which a sale of invoices in initiated by the supplier—supply chain financing is initiated by the buyer who creates a technology platform through which the supplier can select which invoices he wants to get paid on earlier. Because of this, the fee for an SCF transaction – which is covered by the supplier, might be lower than that for factoring.

Supply Chain Factoring allows the supplier to maintain control over his or her business

However, suppliers should carefully consider the terms of a reverse factoring agreement. Some arrangements come with covenants that mandate disclosure of proprietary information or require that the supplier factor all of their invoices with the provider. In that case, factoring may be a better option because it allows the supplier to maintain control over his or her business.

Additionally, some buyers may use SCF to justify extending the payment terms for longer than normal, thus forcing the suppliers to take a discount if they want to get paid earlier.

Whether you are evaluating a buyer-led SCF or want to optimize your working capital by other means, contact Business Factors & Finance today to find the best alternative for your business.

Supply chain factoring is a term that conflates factoring with supply chain financing.

Some buyers may use supply chain financing to justify extending the payment terms for longer than normal, thus forcing the suppliers to take a discount if they want to get paid earlier.

If you want to learn about more about factoring, please visit our Invoice Financing, Small Business Factoring or Non-recourse Factoring pages.

Factoring fees depend on the dollar value and number of invoices being factored, as well as the industry you are in and the credit profile of your customers. To request a quote, please fill out this short form.

How does supply chain financing work?

SCF involves a buyer, supplier, financing partners and a technology provider. The typical process is as follows:

  • Suppliers upload invoices to a technology platform
  • Invoices are approved by the buyer
  • Suppliers select which invoices they want to monetize early
  • The funds are wired to the suppliers by the financing partners
  • The financier collects payment for the invoice from the buyer when it is due

Supply chain facilities may come with reporting requirements and covenants that adversely affect the supplier’s business. Factoring may be a better alternative for suppliers who want to maintain control over their business.

Case study: Electric parts manufacturer in need of working capital

SCF involves a sale of outstanding invoices to a third-party financing company

An electric parts manufacturer was offered supply chain financing through a financing partner after the buyer extended its payment terms to 120 days. The interest rate on the facility was attractive but upon a close review of the terms, the manufacturer found out that he would have to submit all of their invoices to the financing partner to take advantage of the low rate.

Additionally, the agreement contained provisions that authorized the financing company to share information with the supplier’s buyer. That meant that the buyer would have access to confidential information about the supplier, which could give it undue influence on the supplier’s business.

After considering the terms of the arrangement, the manufacturer decided to factor its invoices instead.

Factoring works in four simple steps:

  • The business provides a factor with a copy of the invoice that was sent to the buyer
  • The factor verifies the invoice and runs a credit check on that buyer
  • The factor advances a portion of the outstanding amount
  • Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees

Below are the sample terms for a similar transaction. To get a quote, please contact one of our executives.

  • Invoice amount: $200,000
  • Advance rate: 85%, or $170,000
  • Reserve: $30,000, or 15%
  • Fees: Monthly fee of 2.5%, up to the amount of the reserve
  • Type of arrangement: Non-recourse

In this scenario, the supplier would pay $5,000 per month to factor the invoice. Once the invoice is paid, the factor would return the reserve, minus the factoring fee. The advantages of this transaction are two-fold.

First, the fee is capped at the amount of the reserve. If, after six months, the factor is still unable to collect on the invoice, the supplier does not pay any additional fees. Secondly, this arrangement is non-recourse, meaning that if the factor cannot ultimately collect on the invoice, it absorbs the loss.

However, factors are not collection agencies nor do they buy defaulted invoices. A factor always runs a credit check on the buyer and verifies the invoice before agreeing to purchase it. For more common misconceptions regarding factoring, please refer to our Invoice Factoring page.

Conclusion

To recap, supply chain financing (SCF) is a working capital alternative that involves a sale of outstanding invoices to a third-party financing company. An SCF transaction involves a buyer, its suppliers, financing providers and a technology platform. Unlike factoring, the transaction is initiated by the buyer which could result in lower fees.

However, suppliers should carefully evaluate an SCF agreement to ensure that it does not include any clauses that would jeopardize their business, such as the necessity to submit all invoices to the platform, which would then share confidential information about the supplier with the buyer.

Additionally, some buyers may use SCF to justify unusually long payment terms thus forcing suppliers to take discounts through the platform. Factoring can be a good alternative for suppliers who want to maintain control over their business. It is a sale of invoices initiated by the supplier. Factoring fees depend on the number and dollar value of invoices purchased, as well as the industry the supplier is in and the creditworthiness of their buyer. Contact one of our executives today to find the best working capital alternative for your business.

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