Supply chain financing is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer’s behalf. Supply chain finance reduces the risk of supply chain disruption and enables both buyers and suppliers to optimize their working capital. It’s also known as reverse factoring. Supply chain finance works best when the buyer has a better credit rating than the seller and can thus access capital at a lower cost.
What are the Features of Supply Chain Financing?
- Short Term Credit or Working Capital Loan for procurement of stock.
- Finance customised as per your individual business cycle.
- Support for seasonal requirement.
- Flexibility of repayment with part and prepayment options
- Buyers can extend payment terms.
What are the Advantages of Supply Chain Financing?
- It provide longer payment terms and an improved cash conversion cycle.
- It helps to Reducing supply chain risk.
- It helps to Strengthening supplier relationships.
- In a Supply Chain Financing buyers can lengthen payment terms if necessary, giving them more flexibility.
- Suppliers can control their cash flow and Suppliers have access to lower interest rates.
What are the limitations of Supply Chain Financing?
- The biggest downside to the supply chain finance model is that it’s typically reserved for a buyer’s top 1% of suppliers.
- In Supply Chain Financing Large suppliers actually have a better credit rating than the buyer.
- Risk is the possibility that suppliers will encounter a business scenario that threatens their financial health.
- Because large corporate buyers typically have a higher credit rating, the financing is cheaper than it would have been for the supplier.
- A financial risk event can occur as a result of a supplier bankruptcy, market volatility and much more.