Supply Chain Finance
Definition of 'Supply Chain Finance'
A set of technology-based business and financing processes that link the various parties in a transaction – the buyer, seller and financing institution – to lower financing costs and improved business efficiency. Supply chain finance (SCF) provides short-term credit that optimizes working capital for both the buyer and the seller. Supply chain finance generally involves the use of a technology platform in order to automate transactions and track the invoice approval and settlement process from initiation to completion. The growing popularity of SCF has been largely driven by the increasing globalization and complexity of the supply chain, especially in industries such as automotive, manufacturing and the retail sector.
Investopedia explains 'Supply Chain Finance'
There are a number of SCF transactions, including extension of buyer’s Accounts Payable terms, inventory finance and payables discounting. SCF solutions differ from traditional supply chain programs to enhance working capital, such as factoring and payment discounts, in two ways –
A typical extended payables transaction works as follows. Let’s say Company X buys goods from a supplier Y. Y supplies the goods and submits an invoice to X, which X approves for payment on standard credit terms of 30 days. If supplier Y requires payment before the 30-day credit period, the supplier may request immediate payment (at a discount) for the approved invoice from Company X’s financial institution. The financial institution will remit the invoiced amount (less a discount for early payment) to supplier Y. In view of the relationship between Company X and its financial institution, the latter may extend the payment period for a further 30 days. Company X therefore has obtained credit terms for 60 days, rather than the 30 days provided by supplier Y, while B has received payment faster and at a lower cost than if it had used a traditional factoring agency.