It goes without saying that businesses are increasingly international in their operations and as a result supply chains have become global and extended.
However, those very same businesses are becoming increasingly focused on managing inventory and protecting working capital. With global procurement now a reality for many, balance sheets face increased pressure not least because of the rippling effect of Covid. And this is where supplier finance plays a critical – often overlooked – role.
Supplier finance is certainly not new. It is the financing of an invoice once the buyer has accepted to pay. And it can be used at any number of stages in the value chain. But at its heart lies a simple transaction, a process that begins with a supplier sending an invoice to a buyer.
Once the buyer has approved the invoice it has in effect created a payment obligation. It is at this point that the supplier can sell that invoice to a financier. For the supplier possibly acing 90 days payment terms it means they can get funds within days – albeit at a lower cost – while the buyer can pay on pre-existing payment terms.
But the process does not necessarily start and end here. Supplier finance can enter the extended supply chain at any point, for example:
- Purchase orders: increasingly there are some finance organisations that are using buyer Master Purchase Orders for working capital facilities for key suppliers.
- Work in progress payments: as part of a Master Purchase Order agreement
- Vendor-managed inventory: also known as continuous replenishment or supplier-managed inventory, where payment is triggered once goods leave a warehouse
- Inventory in transit financing: where monies are released when goods are being transported
- Proof of Delivery via Forwarder Cargo Receipt (FCR): as more cargo is exported with electronic messages such as FCRs and advanced shipment notices, there will be more opportunities to develop liquidity off these
For many the traditional post-shipment finance model of invoice financing still dominates – a model where a finance company provides supplier early payments as financing from buyer accepted invoices.
The success of supplier finance is of course based on visibility and invoice data integrity. But as we can see the market for supplier finance is seeing some innovation with the ability of funding at many stages throughout the supply chain.