Many businesses are now taking advantage of supply chain finance to improve their working capital, build stronger supplier relationships and reduce supply chain risk. But what is supply chain finance, how does it work – and how can Taulia’s solution help you achieve your goals?

April 14, 2020

What is supply chain finance?

Supply chain finance – also known as reverse factoring (and abbreviated as SCF) – is a way of offering your suppliers early payment in the form of a third party-funded solution. Unlike other forms of receivables financing, the cost of funding for suppliers using supply chain finance is based on your credit rating, rather than theirs. 

That means your suppliers will typically be able to receive funding at a more favorable rate than they can achieve independently. Supply chain finance is usually an off-balance sheet solution, although SCF programs do need to be structured in such a way that they are not classified as debt.

Supply chain finance is also sometimes used as an umbrella term to include other forms of early payment program, such as dynamic discounting. However, dynamic discounting is a self-funded solution in which buyers offer suppliers early payment in exchange for a discount. Supply chain finance, in contrast, is funded by third-party finance providers.

The benefits of supply chain finance

At the heart of any good SCF program is the ability to balance your working capital needs with those of your suppliers. It offers benefits to both buyers and suppliers.

Benefits for buyers

As a buyer, you may be focused on extending your days payables outstanding (DPO) – but conversely, your suppliers will want to get paid as early as possible, thereby reducing their days sales outstanding (DSO). Supply chain finance resolves this conflict by allowing your suppliers to receive payment early, while you pay later on the invoice due date.

As a result, buyers can benefit from supply chain finance in a number of ways, including:

  • Improving working capital position. With supply chain finance, you can benefit from longer payment terms and an improved cash conversion cycle.
  • Reducing supply chain risk. By supporting your suppliers with affordable financing, you can reduce the risk of disruption to your supply chain.
  • Strengthening supplier relationships. Helping your suppliers improve their working capital can be a powerful tool in building stronger relationships.
  • Gaining an advantage in negotiations. Offering suppliers supply chain finance may also give your procurement team an advantage when negotiating commercial terms.
  • Supporting business growth. Supply chain finance puts your supply chain in a better position to accommodate an increase in business – sudden accelerations can otherwise make it difficult for suppliers to keep up with demand. It can also help your suppliers invest in R&D, which may ultimately benefit your business.

Benefits for suppliers

Your suppliers can also enjoy many benefits as a result of supply chain finance, from DSO improvements to access to low-cost funding – all without affecting their existing credit lines:

  • Working capital benefits. By taking advantage of early payment, suppliers can reduce their DSO, thereby improving their working capital position.
  • Lower cost of funding. Unlike other forms of receivables financing, supply chain finance is based on the buyer’s credit rating – so the supplier’s cost of financing is lower than for solutions such as factoring.
  • Improved cash flow. As above, cash flow improvements mean that suppliers will be in a better position to expand their businesses and invest in innovation.
  • Better cash flow forecasting. A solution which offers greater certainty over the timings of payments can help suppliers forecast their cash flow more effectively and make better-informed business decisions.
  • Access to a user-friendly platform. Supply chain finance programs which leverage sophisticated technology can give suppliers full visibility over the payments process, as well as increasing their operational efficiency.

How does supply chain finance work?

While all supply chain finance programs are different, most will typically involve the following steps:

  1. Supplier uploads an invoice onto the supply chain finance platform.
  2. Buyer approves the invoice for payment.
  3. Supplier selects chosen invoices for early payment via supply chain finance.
  4. Supplier receives payment straight away, with a small fee deducted.
  5. The buyer pays the funder in full on the invoice due date.

That said, there are some different models in the market. Supply chain finance includes both bank-run programs and multi-funder solutions run by technology vendors. Taulia’s program, for example, allows you to choose from a variety of different funding solutions – thereby avoiding the risk of funding concentration.

Taulia’s approach: supply chain finance and technology

By harnessing technology effectively, Taulia is enabling businesses to maximize the potential benefits of supply chain finance.

For one thing, we’ve upgraded our platform and taken full advantage of the insights generated across the 5.2 million buyer-supplier connections on our platform. This means you can gain full visibility over your progress in meeting your working capital goals and track the impact of your program on supplier health. 

Maximizing supplier participation

Our approach also helps you maximize the benefits of your program by making it easy to onboard as many of your suppliers as possible.

All too often, companies using supply chain finance focus on onboarding their largest suppliers, not least because of the costs and administrative burden associated with the onboarding process. This practice was highlighted by PwC’s 2017/2018 SCF Barometer, which found that almost half of SCF programs include no more than 25 suppliers.

But it’s clear that buyers can glean the most benefit from their programs if they are able to onboard all of their suppliers. After all, smaller companies with limited access to external funding may have the most to gain from accessing supply chain finance. Taulia’s approach is therefore to support you in offering supply chain finance to every supplier – whether that’s 100 or 10,000.

This is made possible by the high level of automation within our systems: thanks to our ability to integrate with your ERP system, we can make it quick and easy for suppliers to sign up and start benefiting from the program. Suppliers can enroll in minutes, making it easy to scale your program across your supply chain. 

Switching between supply chain finance and dynamic discounting

Last but not least, our flexible funding model means that you don’t have to choose between supply chain finance and dynamic discounting. Instead, you can switch seamlessly between the two early payment options with our easy-to-use platform.

This means that if your business needs change, or if you have surplus cash at certain times in your business cycle, you can choose to switch from using a supply chain finance solution to a dynamic discounting platform, without any disruption for your suppliers. You can also leverage our AI-powered predictions to decide which of the two funding models will best support your needs.

To learn more about how supply chain finance can help your business, get in touch with us today.