How Supply Chain Financing Reduces Risks for Suppliers and Buyers

The advantages of supply chain financing are clear: it helps companies better manage their cash flows, maintain working capital liquidity and drive greater access to essential resources.

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For many businesses, maintaining a strong cash flow is essential for success. But what happens when buyers don't pay on time? This can put a real strain on your business, and it's a reality more and more organizations are facing today.

Supply chain financing is becoming increasingly popular as businesses of all sizes realize the benefits that can be achieved.

Simply put, supply chain financing allows sellers to get paid early on outstanding bills and invoices.

By leveraging third-party financing, small and medium-sized enterprises can access critically needed capital to fund working capital requirements such as securing inventory, managing supplier payments and scaling operations.  

Supply chain financing is quickly becoming the go-to strategy for companies looking to optimize the cost and performance of their supply chains. Supply chain financing creates a healthy balance between suppliers' demands for timely payments and customers' desire for longer payment terms. On top of this, it helps companies preserve working capital liquidity while driving greater access to essential resources like raw materials and supplies.

From a buyer perspective, supply chain financing gives them much needed “breathing room” to pay for purchases, allowing them the ability to maintain or extend payment terms. At the same time, this provides better cash flow management and greater expenditure control. This enables them to complete the order and bill clients, collecting before they have to pay their suppliers. More and more, there are new buyers without clear visibility into payment terms, causing their credit score to fall well below where they think it is. This is where supply chain financing steps in; it allows suppliers to receive invoice payments faster, reducing the risk of late payments and defaults and improving the credit rating of the buyer in the process.

There is no doubt that the current financial climate has created significant risks for both suppliers and buyers. Interest rates are rising, meaning that access to capital and credit is tightening, resulting in significant shifts across both sides of commercial transactions. These tough times can often lead to bad actors, resulting in the recent rise of fraudulent activity and falsified documents, which have become a growing concern for both buyers and suppliers alike. With supply chain financing, buyers are verifying the invoices, which gives banks and secured lenders confidence in the validity of their collateral (the invoice), removing both barrier to entry and undue risk caused by fraudulent documents.

By allowing suppliers to access a portion of their accounts receivables (AR) upfront from buyers offering early payment through supply chain financing ensures that those businesses have the capital necessary to complete their portion of the supply chain transaction without taking undue risks. Additionally, for suppliers taking advantage of supply chain financing, they ensure that their finances remain secure and stable while continuing to pursue growth opportunities. And, for buyers looking for assurance that their current supply chain is secure, supply chain financing can be a great safety net. It offers buyers one more layer of stability when it comes to protecting their vendor availability - not just today but well into the future. For all parties involved in the supply chain, supply chain financing reduces risk, improves cash flow and leads to improved security and satisfaction when compared to traditional finance models.

Unfortunately, supply chain finance, when done manually, can be a slow and ultimately, a futile process. Organizations across the supply chain need to contract with a bank or lender, then supply documentation that an order was fulfilled and that the invoice is approved to pay. This requires submitting documents that the lender must verify relate to actual, completed transactions across the supply chain. Review and verification can take weeks, if not months, and that is if your documentation is verified at all. And this is before payment can even be issued. These manual processes cause standstills in these organizations’ ability to leverage the financial tools at their disposal. Today, a large number of supply chain financing applications fail due to access and timely verification of key documents, according to IMF and World Bank research. But there is a better way.

As financial technology innovation grows, so too does the potential for leveraging it within the framework of supply chain finance.

The advantages of supply chain financing are clear: it helps companies better manage their cash flows, maintain working capital liquidity and drive greater access to essential resources. Banks and lenders can manage their credit risk more effectively and generate much higher returns on funds utilized. As more and more companies adopt this solution, it's evident that supply chain financing is quickly becoming the go-to strategy for ensuring long-term financial stability. With the ever-changing world of supply chain risk, having a painless, well-connected and secure platform to manage your supply chain financing needs is going to become the norm throughout 2023 and beyond.