What Is Supply Chain Finance? | SCF Guide | Taulia (2024)

Many businesses take advantage of supply chain finance to improve their working capital position, build stronger supplier relationships, and reduce supply chain risk. But how exactly does supply chain finance work, and what are the benefits of supply chain finance? We’re here to answer those questions, and more.

What is supply chain finance?

Supply chain finance– also known as reverse factoring (and abbreviated as SCF) – is a financing solution that allows businesses to offer their suppliers early payment on their invoices through third party funding.

Unlike other forms of receivables financing, the cost of funding in a supply chain finance arrangement is based on the buyer business’s credit rating, rather than the suppliers.That means suppliers will typically be able to receive funding at a favorable rate compared to alternative financing vehicles.

Supply chain finance is also sometimes used as an umbrella term to describe other forms of early payment programs, such asdynamic discounting. However, dynamic discounting is a self-funded solution in which buyers offer suppliers early payment in exchange for a discount. Supply chain finance, in contrast, is exclusively funded by third-party financers.

The benefits of supply chain finance

Supply chain finance programs offer a variety of benefits to both buyers and suppliers, which is a big part of the reason why they’re growing in popularity among businesses looking to improve their working capital position.

Benefits of supply chain finance for buyers

Buyers in supply chains are typically focused on extending their days payables outstanding (DPO) – or in other words, increasing the number of days they can hold on to working capital that would otherwise be spent paying short term obligations in the form of supplier invoices.

But suppliers tend to want to get paid as early as possible, reducing their days sales outstanding (DSO). Supply chain finance resolves this conflict by allowing suppliers to receive payment early, while ensuring that buyers can withhold their payment until the invoice due date.

As a result, buyers can benefit from supply chain finance in a number of ways, including:

• Improving working capital position:With supply chain finance, buyers can benefit from longer payment terms and an improved cash conversion cycle without impacting their suppliers cash flow.
• Reducing supply chain risk:By supporting their suppliers with affordable financing in the form of SCF, buyers can strengthen their balance sheets and therefore reduce the risk of disruption to their supply chain.
• Strengthening supplier relationships:Using supply chain finance, buyers can help their suppliers benefits from an improved working capital position, which can be a powerful tool in building stronger relationships.
• Gaining an advantage in negotiations:Offering suppliers access to a supply chain finance program may also give the buyer business’s procurement team an advantage when negotiating commercial terms.
• Supporting business growth:Supply chain finance prepares supply chains for an increase in throughput – ensuring that suppliers can fulfil sudden accelerations in demand. It can also help suppliers invest in R&D, which may ultimately benefit the relationship at large.

Benefits of supply chain finance for suppliers

Suppliers can also enjoy many benefits as a result of supply chain finance, from DSO improvements to access to low-cost funding – all without affecting their existing credit lines:

• Working capital benefits:By taking advantage of early payment on outstanding invoices through supply chain finance, suppliers can reduce their DSO, thereby improving their working capital position.
• Lower cost of funding:Unlike other forms of receivables financing, supply chain finance is based on the buyer’s credit rating – so the supplier’s cost of financing is lower than in solutions such as factoring.
• Improved cash flow:The cash flow improvements available through supply chain finance mean that suppliers will be in a better position to expand their businesses and invest in innovation, which can benefit their buyers.
• Better cash flow forecasting:A solution which offers greater certainty over the timings of payments can help suppliers forecast their cash flow more effectively and make better-informed business decisions.
• Access to a user-friendly platform:Supply chain finance programs which leverage sophisticated technology can give suppliers full visibility over the payments process, as well as increasing their operational efficiency.

How does supply chain finance work?

While all supply chain finance programs are different, most will typically involve the following steps:

1. Supplier uploads an invoice onto the supply chain finance platform.
2. Buyer approves the invoice for payment.
3. Supplier selects chosen invoices for early payment via supply chain finance.
4. Supplier receives payment straight away, with a small fee deducted.
5. The buyer pays the funder in full on the invoice due date.

That said, there are some different models in the market. Supply chain finance includes both bank-run programs and multi-funder solutions run by technology vendors. Taulia’s program, for example, allows you to choose from a variety of different funding solutions – thereby avoiding the risk of funding concentration.

Taulia’s approach: supply chain finance and technology

By harnessing technology effectively, Taulia is enabling businesses to maximize the potential benefits of supply chain finance.

For one thing,we’ve upgraded our platform and taken full advantage of the insights generated across the 5.2 million buyer-supplier connections on our platform. This means you can gain full visibility over your progress in meeting your working capital goals and track the impact of your program on supplier health.

Maximizing supplier participation

Our approach also helps you maximize the benefits of your program by making it easy to onboard as many of your suppliers as possible.

All too often, companies using supply chain finance focus on onboarding their largest suppliers, not least because of the costs and administrative burden associated with the onboarding process. But it’s clear that buyers can glean the most benefit from their programs if they are able to onboard all of their suppliers.

After all, smaller companies with limited access to external funding may have the most to gain from accessing supply chain finance. Taulia’s approach is therefore to support you in offering supply chain finance to every supplier – whether that’s 100 or 10,000.

This is made possible by the high level of automation within our systems: thanks to our ability to integrate with your ERP system, we can make it quick and easy for suppliers to sign up and start benefiting from the program. Suppliers can enroll in minutes, making it easy to scale your program across your supply chain.

Switching between supply chain finance and dynamic discounting

Last but not least, ourflexible fundingmodel means that you don’t have to choose betweensupply chain finance and dynamic discounting. Instead, you can switch seamlessly between the two early payment options with our easy-to-use platform.

This means that if your business needs change, or if you have surplus cash at certain times in your business cycle, you can choose to switch from using a supply chain finance solution to adynamic discounting platform, without any disruption for your suppliers. You can also leverage our AI-powered predictions to decide which of the two funding models will best support your needs.

To learn more about how supply chain finance can help your business,get in touchwith us today.