Supply Chain Finance: What’s It All About?

Supply Chain Finance: What’s It All About?

Picture this. You run a business. It’s successful. You’re a supplier (subcontractor, etc.) to a large company (major retailer, major contractor, think big and corporate). You get an invitation to join their supply chain finance program. But what does that mean for you? And why is it being offered in the first place?

It’s possible this is the first time you’ve ever heard of supply chain finance, and if it is you wouldn’t be alone. It’s also referred to as supplier finance, or as an early payments program, and essentially, it’s a financing program by a large corporation that lets the businesses it deals with in its supply chain access quick, cost-effective financing.

To explain how this is beneficial, there are a few key terms to come to grips with:Supply chain finance (SCF) program refers to the early payment program often developed by a third-party supplier (e.g. bank or fintech) and run by them on the buyer’s behalf.

Buyer refers to the large company that implements the SCF program.

Supplier refers to the businesses and business owners who are part of the buyer’s supply chain. They will be the ones actively using an SCF program.

Investor refers to the party that purchases the supplier’s invoice at the early payment date. The buyer will pay the investor on the invoice due date, absolving the supplier of any fiscal responsibility.

What does a buyer gain?

You might wonder what a buyer would have to gain, and why they would go to the trouble of ensuring their suppliers access to financing. There are a number of benefits:

  1. It helps make them a preferred customer amongst their suppliers. If suppliers know they will be able to get paid ahead of schedule, they’ll put a higher value on the relationship with the buyer and will be more likely to work with them in the future.
  2. If the buyer itself is experiencing working capital issues and are going to extend supplier terms (i.e. go from 30 to 45 days), implementing a supply chain finance program can help protect their suppliers.
  3. It can assist in streamlining the buyers accounts, giving them greater control over their cash flow.
  4. Most of all, it will strengthen their supply chain. One of the biggest problems for large corporates in any industry is that their supply chains will have problems that have downstream implications to the entire business. The more they can lower the risk of supply chain issues, the better it is for their bottom line and general business health. Take a look at the collapse of global retailer Toys ‘R’ Us if you need a good example of just how adverse the effects of a weak supply chain can be for a business.

What does this mean for Suppliers?

For suppliers, getting the invitation to an early payment program can be extremely advantageous. As a method of finance, it is both simple and can be cost-efficient. And as you must be invited to participate by the program owner (the buyer), there are no lengthy approvals or onboarding processes. With Timelio-run programs, all that is required is that you create an online account (something which takes less than 10 minutes). Once you’ve done this, it is merely a matter of selecting the invoices you want paid from the buyer-approved list, and the money is then transferred to your account. That’s it.

Most encouragingly for the supplier, accessing early payment on your invoices via a SCF program can be quite beneficial. For example:

A boost to your working capital. Normally when acting as a supplier you would need to float the costs of production, then wait potentially 90 days for payment. An invitation to an SCF program eliminates that wait, meaning you can get paid straight away and put that money in to filling a new order and/or promoting strong business growth.

Extremely competitive funding rates. Because the buyer is essentially acting as a guarantor, the supplier is able to leverage their much stronger credit profile to get an extremely competitive rate of financing that would regularly be out of reach for most suppliers.

No added debt. As you are part of an SCF program, when you fund by electing to receive early payment you don’t take on any debt. This also means there is no recourse to you should the buyer fail to pay the investor on the invoice due date.

Puts you in control. You get to elect if and when to get early payment, putting you in control of your receivables, as well as saving you time and money on chasing down late payments.

Supply chain finance programs are a great opportunity for businesses to access funding to help them improve working and growth capital, whilst allowing large corporates to keep their supply chains strong. If you’ve been invited to join a Timelio run SCF program, and you want to find out more about it, get in touch with me on 0438 571 088 or at apinkus@timelio.com.au.

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