A set of technology-based business and financing processes that link the various parties in a transaction – the buyer, seller and financing institution – to lower financing costs and improved business efficiency.
Supply chain finance (SCF) provides short-term credit that optimizes working capital for both the buyer and the seller.
Supply Chain Finance
Supply chain finance generally involves the use of a technology platform in order to automate transactions and track the invoice approval and settlement process from initiation to completion. The growing popularity of SCF has been largely driven by the increasing globalization and complexity of the supply chain, especially in industries such as automotive, manufacturing and the retail sector.
There are a number of SCF transactions, including extension of buyer’s Accounts Payable terms, inventory finance and payables discounting. SCF solutions differ from traditional supply chain programs to enhance working capital, such as factoring and payment discounts, in two ways –
- SCF connects financial transactions to value as it moves through the supply chain
- SCF encourages collaboration between the buyer and seller, rather than the competition that often pits buyer against seller and vice versa
For example, the buyer will attempt to delay payment as long as possible, while the seller seeks to be paid as soon as possible. SCF works especially well when the buyer has a better credit rating than the seller and can therefore access capital at a lower cost. The buyer can leverage this advantage to negotiate better terms from the seller such as an extension of payment terms, which enables the buyer to conserve cash or use it for other purposes. The seller benefits by accessing cheaper capital, while having the option to sell its receivables to receive immediate payment.
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