Connect with us

Hi, what are you looking for?


Supply Chain Finance (SCF): A new age of financing

Supply chain finance is a collection of technologically advanced business and financing processes that reduce costs and increase efficiency for all parties involved in a transaction.

Supply Chain Finance (SCF): A new age of financing
Image credit:
Supply Chain Finance (SCF)

Supply chain finance (SCF) refers to a collection of technology-based solutions to reduce financing costs and increase business efficiency for buyers and sellers involved in a sales transaction.

SCF techniques function by automating transactions and tracking the approval and payment of invoices from start to finish. Buyers agree to accept their suppliers’ bills for financing by a bank or other outside lender, referred to as “factors” in this paradigm. SCF also benefits all participants by providing short-term loans that optimize working capital and liquidity to both parties. Buyers receive a longer time to pay off their accounts, while suppliers get faster access to the money they owe. The parties can utilize the cash on hand for additional initiatives to keep their respective operations running smoothly on either side of the equation.

How does it work?
LUKOIL - Supply Chain Finance LUKOIL

Step 1: Buyer purchases goods or services from the seller. It is preferable when the buyer has a better credit rating when compared to the seller.

Step 2: Seller issues their invoice to the buyer, with payment to be made within a certain number of days (e.g., 30, 60, or 90 days)

Step 3: Buyer approves the payment invoice

Step 4: Seller requests early payment on the invoice

Advertisement. Scroll to continue reading.

Step 5: Funder (Supply chain finance partnered with) sends payment to the supplier, with a small fee deducted

Step 6: Buyer pays the funder on the invoice due date as per their agreement

Where accounting is concerned, the buyer who implements the SCF program will need to make sure SCF is classified as an on-balance sheet item rather than bank debt.

Let us look at hypothetical examples to get a better understanding of SCM financing:

A buyer places a PO (Purchase order) with a seller for products. Typically, the supplier would send the products to the customer and then submit an invoice in accordance with their payment terms (such as net 30). The customer would then have 30 days to settle their invoice.

If the supplier needs their invoice paid sooner (or if the buyer doesn’t have the cash in hand or wants to use it for working capital), they can use an existing supply chain financing platform. This involves the financer or lender, who will immediately pay the purchase invoice on the buyer’s behalf and then extend the payment terms to the buyer agreed upon.

Advertisement. Scroll to continue reading.

This is a win-win opportunity for both the buyer and the supplier: the buyer gets to keep their working capital for longer without jeopardizing their relationship. In contrast, the supplier gets paid immediately, giving them additional working money to use. There are other benefits as well.

Some of the critical benefits for sellers are:

Optimizing working capital: Suppliers who use supply chain finance might get paid for their invoices sooner than they would otherwise. Consequently, their days’ sales outstanding (DSO) has decreased, resulting in increased working capital.

Access lower-cost capital: Because the cost of funding for suppliers is typically cheaper than it is for other funding sources, such as factoring, supply chain finance is an appealing option to access cash.

Apart from optimized working capital, Some of the critical benefits for a buyer are:

Improve supply chain health: By providing supply chain financing to suppliers, buyers can lessen the risk of a future disruption in the supply chain affecting their own operations.

Advertisement. Scroll to continue reading.

Strengthen supplier ties: By offering low-cost capital to suppliers, buyers may enhance their relationships with them and, as a result, maybe in a better negotiation position.

Written By

Neel writes content for Empire weekly covering the Financial and Stock Markets. He is an avid enthusiast in the finance domain. He is currently pursuing MBA in Business Management. He has completed his Bachelors of Commerce and has worked in the Auditing domain before going for his masters.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Latest News

24th Edition BFSI IT Summit

Press Release

Mumbai: The banking, financial services, and insurance (BFSI) sector in Mumbai is currently undergoing a profound transformation, fueled by rapid technological advancements and a...

Best No Code App Builders Best No Code App Builders

Digital Transformation

In the ever-evolving landscape of technology, the rise of No Code App Builders stands as a testament to the democratization of app development. Gone...

11 Best AI Image Enhancer & Upscaler Tools (February 2024) 11 Best AI Image Enhancer & Upscaler Tools (February 2024)

Artificial Intelligence

In a world flooded with digital photos, the demand for high-quality images is ever-growing. Whether you’re a social media enthusiast or a professional in...


You May Also Like

Mystery and History

The great imaginative minds have given birth to some of the most legendary and eye-popping hybrid mythological creatures.


A complete system audit of the bank's IT system has also been ordered.

Empire Weekly Exclusive

Because of the character's widespread appeal, Iron Man has appeared in multiple comics, television series, and films.

India News

Saweety Boora produced a superb show against her Chinese opponent and was declared winner by points as India won both the finals scheduled for...