What is supply chain finance?

Also referred to as supplier finance, supply chain finance is another form of alternative funding that business leaders are seeking out in order to grow their venture and maintain working capital. We take a look and whether this solution might work for you.

Think of supply chain finance as a type of cash advance that’s based on the credit rating of companies in the supply chain. How does it work? In a nutshell, it’s a way for start-ups and SMEs to benefit from the higher credit scores of their buyers, and for buyers to benefit from longer payment terms. Let’s look at supply chain funding in a little more detail.

Moving through supply chain finance

First of all, a supplier – it might help to think of the supplier as a small business owner – issues an invoice to a buyer. The buyer then tells the supply chain finance lender that the invoice has been approved for payment. This means that the supplier is then able to get the value straight away – once a small fee has been deducted from the balance. And so, when payment is due, the buyer simply pays the lender and misses out the supplier, who has already received their payment.

The benefits of supply chain finance

One major benefit to business owners is the guarantee of stable cashflow, because they receive payments in just a few days, rather than waiting to reach the due date – this length of time can vary depending on their payment terms. In this way, small business owners enjoy very similar benefits to invoice finance.

It can also benefit the buyer, as they maintain their working capital until payment is due, while ensuring a good relationship with their supplier who isn’t relying on them to settle their account early as the payment delay has been absorbed by the lender.

It might seem incredibly similar to invoice finance, but it’s important that suppliers – or business owners – view it as a collaborative process in which the three parties have a joint arrangement. Extra to invoice financing, because supply chain funding is directly based on the buyer’s credit rating, the cost can be lower too.

How Funding Bay can help

Funding Bay is a finance introducer that can find the right solution for your business, and the team can put business owners in touch with the lenders specialising in supply chain finance who will best suit their requirements.

This means they will not only benefit from personal, jargon-free guidance, but also be able to focus on the day-to-day running of their company without worrying about cashflow. It’s this peace of mind that can enable then to plan ahead and grow their venture, rather than getting bogged down in chasing much-needed finance.

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