A new service has quietly been shifting the environment of supply chain finance: financial tech companies that act as brokers between suppliers and buyers. Believe it or not, these companies have created a system that is beneficial to both sides. This is possible due to their capability to improve working capital, decrease contract processing costs and offer more favorable payments terms to both sides. Their strategy is found in practice from heavy equipment financing to healthcare supply chains and is gaining more momentum from small-to-medium entities (SMEs).
“Fintech” is a term that everyone knows. The industry has received more than $31B in investments in the last 3 years. But there is one application that’s changing the global landscape of procurement for companies of all sizes. Fintech companies in the supply chain environment can be thought of as a digital procurement broker. Whether it’s for a buyer or supplier, they use a network of banks to offer the most favorable trade financing terms. There are many structures fintech companies choose to use, but the process begins with a purchase request from a buyer and ends once the supplier has been paid. When acting as an intermediary they can allow a supplier to be paid in 10 days and a buyer to pay in 120 days all under the same agreement. The fintech company will pay the supplier upfront, sometimes within 2 days. This payment schedule allows the fintech intermediary to get higher discounts from supplier. The buyer can extend out their accounts payable, which is due to the fintech company. The options are usually between 30 and 120 days. On top of that, the payment processing costs on both sides are reduced due to an automated processing system provided by fintech platforms.
In summary, fintech solutions in Supply Chain Finance (SCF) offer buyers:
- Improved working capital through extended accounts payable
- Lower processing/administrative cost
- More favorable financing terms
- Streamlined procurement process
- Suppliers gain all the benefits of the streamlined process as well as a much shorter payments terms (paid shortly after contract origination through the fintech provider) lightening the pressure on accounts receivable.