Buyers are often interested in improving working capital position.
Supply Chain Finance (SCF), is a flexible financing solution that allows buyers to maintain or extend payment terms with suppliers in order to improve cash flow, while simultaneously giving those suppliers the ability to get paid early on approved invoices. Unlike other financing programs, like factoring, the cost of funding for suppliers under an SCF program is based on their customer’s credit rating which is often time better than theirs. This means that suppliers will generally be able to receive early payment at a more favorable rate than they could have achieved by themselves.
When structured correctly these programs can provide an elegant solution to the different working capital goals of buyers and suppliers. By extending or optimizing payment terms, buyers can hold onto cash longer, improve days payables outstanding (DPO), and reinvest capital into the business for growth and expansion. Suppliers, on the other hand, can utilize SCF to get paid quicker, reduce their days sales outstanding (DSO), and support additional sales growth by deploying capital quicker and more efficiently across their operations.
Despite the obvious benefits there are often questions from buyers and suppliers when considering Supply Chain Finance. Let’s dive into some of the more common misconceptions and the realities of SCF.
Myth #1: Only Large Companies Can Use Supply Chain Finance
Once a tool for only the largest and most credit worthy global corporations, today supply chain finance programs are finding new homes in the toolchests of mid-market treasurers, CFOs, and procurement teams looking to manage working capital and improve operational efficiency. Collaboration between technology companies and financial institutions as well as more efficient and automated supply chain processes have all combined to drive growth in these programs making them easier to deploy and benefit a broader population of companies.
Additionally, these programs can provide a significant benefit to mid-sized companies given the current challenging economic environment. Tighter lending standards, higher interest rates, and supply chain disruptions tend to impact these companies more acutely than their larger and more financially secure counterparts. Supply chain finance is an example of a solution that can be deployed to benefit operational efficiency and improve working capital metrics while providing suppliers with a source of fairly priced financing.
Myth #2: Supply Chain Finance Leads to Longer Payment Terms
Supply chain finance programs do not result in extended payment terms by default as it largely depends upon program structure, goals, and availability of funding. These programs allow companies to optimize their working capital efficiently by holding onto cash longer while providing suppliers with the ability to get paid early at a small discount via third-party funding.
When structured correctly these programs can benefit suppliers across the supply chain. Funds that are freed up by payment term optimization can be reinvested into the supply chain and benefit suppliers in the form of higher order volumes and competitive financing. Additionally, research shows that access to financing through a supply chain finance program can support small to medium sized suppliers by improved operational performance, mitigated impact of market volatility on cash flow, and unlocked working capital.
Myth #3: Supply Chain Finance is Only Offered by Banks
Historically large global banks were the primary sources of liquidity for supply chain finance programs due to, among other things, their capital structure, customer relationships, and operational infrastructure.
While banks play a significant role in supply chain finance, the introduction of non-bank financial institutions, technology providers (such as Raistone), and trade finance platforms has streamlined access to these solutions, allowing companies to deploy such programs more quickly, efficiently, and at a lower cost.
Myth #4: Supply Chain Finance is Difficult to Implement
As with many large corporate initiatives, the success of a supply chain finance program is dependent upon a coordinated approach that leverages technology to automate workflows and drive supplier adoption and success. Overly manual procedures and tedious enablement efforts pose a potential threat to the success of a program from a cost standpoint, and also risk alienating strategic and crucial suppliers.
While internal alignment is extremely important, many of the operational and supplier onboarding challenges can be solved by leveraging trade finance technology. Direct integration to ERP systems and Procure-to-Pay solutions, such as those provided by Raistone, helps to automate the flow of trade finance information, and simplify the end-to-end process for buyers and suppliers. Supplier onboarding, which often could take weeks under bank-led programs, can be streamlined by leveraging APIs and workflows to allow suppliers to be transacting within a few days.
Myth #5: Supply Chain Finance Can Only be Used With Suppliers in The United States
According to recent research, supply chain finance programs have grown 20% year over year globally. This has been driven in part by the rebound in trade after the Covid-19 pandemic, but also due to the need for accessible and affordable financing for small to medium sized businesses, many of which are based outside of the United States.
Supply chain finance programs offered by large and mid-market companies can provide a significant lifeline to many of these global suppliers. By accessing affordable financing based upon their customer’s credit rating, these suppliers can fund their operations, reinvest in their businesses, and drive further growth. Furthermore, advances in trade finance technology and better collaboration between buyers, suppliers, and funders has streamlined access to these programs making it easier companies of all sizes and jurisdictions to participate.
Stabilize Your Supply Chain With Raistone
Raistone was founded with a singular mission to level the playing field for businesses looking to access financing. Through best-in-class technology coupled with unparalleled access to institutional capital, we help companies, large and small, find creative ways to unlock liquidity to help fund their growth and vision.
Technology-driven trade finance solutions, like those provided by Raistone, have lowered the barrier for companies looking to deploy supply chain finance programs. Automation of processes, streamlined supplier enablement, and flexible program structures now allow companies of all sizes to improve their working capital while supporting the financial well-being and health of their supply chain.
Get in touch to learn how your company can gain flexible payment terms and bring value to your suppliers.