Supply chain finance, also known as reverse factoring, links the seller, the buyer and the financing party to improve business cash flow on all sides.
How Supply Chain Financing Works
In leveraging supply chain finance, suppliers sell outstanding receivables to financial institutions to accelerate payment of receivables and extend payment flexibility to customers.
Once the supplier sends an invoice to the buyer, the buyer confirms to the financial institution that the invoice is approved and the supplier receives payment immediately. When the invoice is due, the buyer pays the financial institution back.
Benefits for Buyers Using Supply Chain Financing
There are many benefits for buyers using supply chain financing, including increased liquidity, less contentious relationships with suppliers, decreased liabilities and consolidated finances.
Increased Liquidity
Buyers initiate reverse factoring so their suppliers receive more streamlined payments at lower interest rates. The process aids liquidity for buyers because they receive lengthier and generous payment terms.
Buyers also don't need to contend with early payment requests from suppliers. In the reverse factoring process, suppliers are already paid at previously agreed-upon, and typically faster, terms.
Less Contentious Relationships
Supply chain finance helps the supply chain process run more smoothly and provides advantages for everyone involved.
In dealing directly with a supply chain funder (i.e. the factor), buyers can usually avoid payment disagreements with suppliers. When buyer/seller relationships don't deteriorate based on late payments or failure to pay, they can grow stronger and build trust, and are thus more likely to expand.
Decreased Liabilities
A business liability is money owed from past transactions that will require additional funds to resolve.
Buyers want to reduce liabilities so they can procure lower interest rates from lenders and maintain overall financial health. Using reverse factoring, the factor is on top of invoices and payments so buyers can focus on other things.
For the rest of the article, head over to the AMEX Business website.
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