How Does Supply Chain Finance Work?
Supply chain finance is a solution for those times when managing cash flow presents a significant challenge.
It is usually when you’re sandwiched between slow-paying customers and important suppliers who want quick payment.
This scenario can hamper the ability of a business to grow or even crush it.
It needn’t be so.
How does it work?
The finance company provides you with a revolving facility which you can dip into at anytime to pay your suppliers. You can pay some or all. It’s up to you.
You return the money to the facility when your customers pay and you have funds available to be used again.
Each time you pay a supplier you are charged a fee based on the amount you pay and how long it takes for the money to be repaid – usually it is a small daily rate.
So, it adds to your costs. However, you can offset the fees by offering to pay suppliers early in exchange for a discount.
How does supply chain finance help you?
Improved cash flow
Because you use the financier’s capital to pay your suppliers, you keep your own money in the bank. It can be used to generate growth or plug holes that emerge in day to day operations.
Some clients use supply chain finance solely to offer early payment to suppliers in exchange for discounts. If the negotiated discount is greater than the financier’s fees the client can make a tidy profit.
Stronger and more reliable supply chain
By providing suppliers with the assurance of timely payment, and even early payment, clients find they can negotiate better prices; credit limits are increased and the pool of suppliers willing to provide services rapidly grows.
As with all finance products, clients must weigh the cost against the benefits.
Supply chain finance is best suited to companies which are growing and are looking for a strategy to enable that growth.
If the value created is greater than the cost of the facility it is a perfect solution.