What is 'Supply Chain Finance'

Supply chain finance is 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.

BREAKING DOWN '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 –

  • SCF connects financial transactions to value as it moves through the supply chain.
  • SCF encourages collaboration between the buyer and seller, rather than the competition that often pits buyer against seller and vice versa.

For example, the buyer will attempt to delay payment as long as possible, while the seller seeks to be paid as soon as possible. SCF works especially well when the buyer has a better credit rating than the seller and can therefore access capital at a lower cost. The buyer can leverage this advantage to negotiate better terms from the seller such as an extension of payment terms, which enables the buyer to conserve cash or use it for other purposes. The seller benefits by accessing cheaper capital, while having the option to sell its receivables to receive immediate payment.

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.

RELATED TERMS
  1. Purchase-Money Mortgage

    A mortgage issued to the borrower by the seller of the home as ...
  2. Owner Financing

    When a property buyer finances the purchase directly through ...
  3. Buyer's Market

    A situation in which supply exceeds demand, giving purchasers ...
  4. Simultaneous Closing - SIMO

    A real estate financing strategy in which two simultaneous transactions ...
  5. Invoice

    A commercial document that itemizes a transaction between a buyer ...
  6. Buyer's Credit

    A loan facility extended to an importer by a bank or financial ...
Related Articles
  1. Investing

    The Ins And Outs Of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  2. Investing

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
  3. Investing

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  4. Investing

    What's an Invoice?

    An invoice is a document that itemizes a transaction between a buyer and a seller. Invoices can also be called bills or statements.
  5. Investing

    Accounts Payable

    Accounts payable is the amount of a company's total invoices currently waiting to be paid. These invoices are from vendors for products and services that were recently delivered.
  6. Investing

    What's Trade Finance?

    Essentially, trade finance makes it possible and easy for exporters and importers to trade, and its expansion has accommodated a massive international trade growth.
  7. Small Business

    Explaining the Supply Chain

    A supply chain is the cumulative network involved in moving raw materials, components and finished products from original suppliers to end users.
  8. Investing

    4 Ways Millennials Can Buy Private Businesses

    Buying private businesses is a good way to have greater control over your investments while increasing your income and avoiding the fluctuations of the market.
  9. Investing

    What is a Financial Market?

    “Financial market” is a broad term used to describe any forum where buyers and sellers meet to trade assets.
  10. Investing

    Target Tells Suppliers To Move Faster Or Pay-Up (TGT)

    Target has begun cracking down on its vendors in an attempt to increase its supply chain efficiency, says a report.
RELATED FAQS
  1. What is the difference between supply chain management and value chain management ...

    Discover what the principal differences are between utilizing a supply chain management system and a value chain management ... Read Answer >>
  2. What is the difference between a value chain and a supply chain?

    Understand the difference between a value chain and a supply chain. Learn why a company would want to maximize the value ... Read Answer >>
  3. What does it mean when advertisers say that "financing is available"? Should I trust ...

    When an advertisement says "financing", it means that the seller is going to give you a loan on an item that you purchase. ... Read Answer >>
  4. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  5. What is a bank's legal liability when issuing a letter of credit?

    Learn the responsibility of banks that issue letters of credit Letters of credits ensure payment on transactions between ... Read Answer >>
  6. What are the differences between Ex Works (EXW) and Free On Board (FOB)?

    Learn about Ex Works and Free on Board, the main difference between these Incoterms, and the responsibilities of buyers and ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center