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Most businesses are facing the Squeeze. Why?

Paying suppliers before their own goods or services can be sold…simple and this has killed many great burgeoning enterprises. There are solutions available to savvy business owners. The “inadequate working capital” was identified by ASIC as the leading cause of small business failure in 2014, and it continues today. Supply chain finance provides an innovative solution to challenge this problem.

Around 80% of BtoB (business to business) transactions are undertaken on credit terms of some form, and trade credit constitutes about a third of total business assets. Supply chain finance is simply to pay suppliers and cash flow from receivables. It is a small but rapidly growing section of business lending; representing almost 6% of the total global receivables financing market.

Supply chain finance is a much more sophisticated tool than simple trade finance, factoring, or reverse factoring.

How does supply chain finance work?

It optimises both the “availability” and “cost of capital” within an individual [buyer<->supplier] supply chain.

It does this by bringing together all the information generated during supply chain activities and matching this information with the physical control of goods. Because the lenders know exactly who has physical control of the goods at any time, they can mitigate financial risk within the supply chain. This mitigation of risk means borrowers can raise more capital, sooner, and at lower rates. Rates are based only on the buyer’s risk, not the supplier risk.

Traditional supply chains pit buyers against the supplier. The buyer seeks to delay payment as long as possible while the supplier seeks the earliest possible payment. Trade finance is a loan, that purchasers can take out to pay suppliers, however, it does not produce any collaboration in the supply chain. When a business borrows money against invoices it has raised but which customers have not paid (receivables), this is called “Factoring”. “Reverse factoring” is when a company borrows money from a finance company to pay its suppliers, where the suppliers have the option to receive faster payment in return for a discount. This is a lower-cost form of financing that helps suppliers reduce waiting times for payment. Supply chain finance combines these two forms of finance to help suppliers and buyers smooth and improve cash flow through the use of technology.

Supply chain finance brings both parties into a collaborative online platform, where they all benefit. Solutions can be customised to meet the specific needs of the clients on both sides of the transaction. Using technology to link suppliers, buyers, and a financial institution, supply chain finance provides short-term credit to pay approved invoices on behalf of the buyer. If the loan is paid before maturity, the buyer simply pays a small fee, or if the loan is repaid at maturity, interest on the loan will be added to the fee. Conversely, the supplier can secure immediate payment from the financial institution for a small discount on the invoice. This discount is passed onto the buyer, who can elect to utilise this discount to extend terms with the financial institution. Payments are typically the next business day.

Supply Chain Finance


p style=”text-align: center;”>Photo Credit: Pete Loughlin [Purchasing Insights]

Bringing suppliers into the system is both a challenge and a competitive advantage for users. The shared investment in the initiative also builds trust and collaboration between parties. All parties need to invest in their processes to ensure these integrate with the supply chain finance platform. The supplier raises a purchase order and enters this into the platform. The supplier receives the order via the platform, raises the invoice and uploads it to the platform. The buyer approves the invoice and the supplier can determine when they require payment, early for a discount, at maturity for full payment. The supplier delivers the goods or service, the buyer must pay for these at the maturity of the terms or early for a discount. The platform can manage local or foreign currency transactions, track shipping and manage jurisdiction and tax considerations. Platforms provide real-time tracking of transactions, improving workflow.

Supply chain finance does involve additional costs. One-off cost includes establishing the system, onboarding suppliers, training staff, and financier due diligence. Ongoing costs include fees for service as well as any interest costs, IT servicing, and continual support and onboarding of suppliers.

Global demand for supply chain finance is growing rapidly from both sides of the agreement. Globalisation has opened new markets but has also increased risk in supply chains, which has a corresponding impact on companies’ financial position. There is a growing focus on the value and need for working capital in corporations and smaller businesses. Suppliers are also keen to access the liquidity and lower financing costs enabled by supply chain finance.

Grow Capital has access to a range of specialist supply chain finance providers. We can assist with business funding to solve your cash flow and accounts payable challenges. The Grow Capital team works closely with clients to identify a supply chain finance plan that fits the evolving needs of all parties. Contact us today to find out how supply chain finance can help your business grow.

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