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Supply chain finance
Learn about and compare supply chain finance options
If your business purchases goods from overseas suppliers, ensuring that those suppliers are always paid on time can leave a big dent in your day-to-day cash flow. Supply chain finance is designed to help businesses overcome this problem, providing the funds you need to pay suppliers while at the same time allowing you to access the working capital you need to grow your business.
What is supply chain finance?
Supply chain finance allows businesses and suppliers to work together to stabilise their cash flow. It typically features a combination of working capital facilities, usually import finance and debtor finance, to simplify the payment process.
Why might a business need supply chain finance? When buying high-value goods from suppliers, paying for those goods upfront can have a huge impact on cash flow. This type of finance involves a financier paying the supplier’s invoice immediately, allowing your business to continue to trade as normal and pursue growth opportunities, and then pay down your debt once you receive payment from your own customer.
Not only does this mean increased working capital for your business but also a better relationship with your supplier. As a result, the overall stability of your supply chain is improved.
Supply chain finance is sometimes also referred to as reverse factoring, supplier finance, accounts payable finance and trade finance.
What type of business is supply chain finance suited to?
Supply chain finance is an important financing solution for any business that purchases products from overseas-based suppliers and then sells them on to customers on trade credit terms. It’s worth considering for any business that relies on a complex supply chain but is particularly popular across the automotive, manufacturing and retail industries.
As an example, a Singaporean manufacturer may need to import parts from overseas to meet tight production schedules, or a wholesaler may need to maintain sufficient levels of stock of popular products during busy periods such as the lead-up to Christmas.
How does the process for supply chain finance work?
Supply chain finance allows a supplier to take advantage of your business’s strong credit rating to access capital at a lower cost and with better payment terms. It is different to a traditional business loan and is an extension of your business’s accounts payable. It works as follows:
- Your business orders products from the supplier.
- The supplier fulfills the order and then sends you an invoice.
- You confirm that you will pay the invoice at maturity.
- The supplier sells those invoices to an external finance provider at a discounted rate, which means the supplier is paid straight away.
- You pay the finance provider when the invoice matures.
While this is happening, your business can negotiate more favourable payment terms and prices with the supplier, maximising profitability and shoring up your supply chain. Your supplier may even decide to implement supply chain finance with its own suppliers, which can then strengthen any potential weak links in the chain.
How to compare your options for supply chain finance
Make sure to consider the following factors when comparing your supply chain finance options:
- Term. Supply chain finance is typically available for a maximum term of up to 180 days, with the term matched to that of the underlying transaction. Check the maximum term available from each finance provider.
- Interest rate. Supply chain finance allows you to access the funds you need at a preferential interest rate, so make sure you compare rates across a variety of providers to work out which provider offers financing at the lowest cost.
- Currencies available. Does the provider offer the finance you need in the global currencies your business needs to use to pay its suppliers?
- Loan amount. Check whether any minimum and maximum loan limits apply and, if so, whether they suit your needs.
- Prepayment. Do you have the flexibility to repay the funds ahead of schedule without incurring any additional fees?
- Integration. How easily and seamlessly can supply chain finance integrate with the procurements and accounts payable sections of your business, allowing you to continue to submit and pay invoices quickly?
Frequently asked questions
Can supply chain finance benefit both buyers and suppliers?
Yes. A well-managed supply chain finance arrangement can improve cash flow for your business and for your supplier, providing access to the funds you need whenever you need them.
Will I need a good credit rating to access supply chain finance?
Yes. The better your credit rating, the more favourable payment terms you can receive.
Do I need any additional software or equipment to use supply chain finance?
No. Many supply chain finance providers operate in the cloud and can be accessed online, with no need to install new software or equipment.
Will I need to change the way I invoice?
No. The supplier will be able to continue invoicing buyers in the same way it already does.
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