Supply Chain Finance
What is Supply Chain Finance (SCF)?
Supply Chain Finance SCF is a cash flow solution that businesses can adopt to help free up working capital stuck in global supply chains. It is a wider category of trade financing, encompassing all the financing opportunities across a supply chain.
What are SCF products?
SCF has two main categories of various products for buyers and sellers to receive finance:
Receivable purchase SCF:
This is when a finance provider purchases the amount you owe to another business, called a receivable, at a slight discount so that you have immediate access to working capital and your debt burden is not affected. The amount is taken off your balance sheet, which can increase your borrowing capacity. These types of products include receivables discounting, forfaiting, factoring, and payables finance (reverse factoring).
Receivables discounting is when a financial institution purchases receivables from a seller of goods or services, such as unpaid invoices, at a slight discount. At the receivable’s maturity, the buyer listed on the receivable pays the financial institution directly, rather than the originator of the invoice (receivable).
Forfaiting is when medium- to long-term payments for foreign accounts receivable (such as letters of credit or promissory notes) are sold at a discounted price for immediate payment. The importer/buyer then pays the financial institution directly upon the receivable’s maturity. Forfaiting only applies to international transactions.
Factoring refers to when accounts receivable documents, such as invoices, post-dated checks, or bills of exchange are sold to a financial institution at a discounted price for immediate payment(see the Trade4MSMEs guide on Trade Documents). Information on other trade documents for export can be seen in the Trade4MSME guide on Trade Documents for Exports. Upon sale, the financial institution also becomes responsible for managing the debtor portfolio and collecting the receivable. As previously, the buyer pays the financial institution directly when the debt is mature.
Payables Finance (reverse factoring) refers to early payments to suppliers by a financial institution both based on the buyer’s creditworthiness and at the buyer’s initiation, not on the seller/supplier’s credit grade or request. The buyer then pays the financial institution directly at the debt’s maturity or due date.
Is where the receivable stays on your balance sheet and is used as collateral to access finance. These products include loan/advance against receivables, distributor finance, loan/advance against inventory, and pre-shipment finance.
Loan/advance against receivables is when financing is made available based on current or future receivables and is usually, but not always, secured with those same receivables. At its maturity, the seller of the receivable accessing the finance repays the financial institution.
Distributor finance is when a large manufacturer or other financial institution provides finance to cover the costs of distributors between the time, they receive goods and the time they sell them to consumers. This finance is usually through direct loans. At maturity, the distributor repays the manufacturer or financial institution directly.
Loan/advance against inventory is a loan to a participant in a supply chain for holding or warehousing inventory. Generally, the loan is issued against that same inventory and the proceeds of sales are used for repayment.
Pre-shipment finance is credit made available to a seller to finance the preparation and shipment of goods to a buyer, generally requiring a purchase order from an anchor firm. The financial institution issuing the finance usually requires a percentage of the value of the order as an advance and disburses the loan in stages as the order is fulfilled. At maturity, the seller repays the financial institution.
SCF techniques are more likely to be used in open account transactions when the two parties know each other and have done business previously. SCF may also be referred to as supplier finance, payables finance, or reverse factoring.
How can I access SCF and what are the benefits?
SCF is offered by banks, funding providers, and alternative lenders, including FinTechs. Some of the benefits your business could gain include:
- Improved working capital efficiency
- Less expensive sources of financing
- Payment security / reduction of late payment
- Mitigation of default risk
- Improved relationships with your anchor company
- Expanded sales, which can enable more growth
- Off-balance sheet financing
Links to Supporting Information
International Finance Corporation SCF+Knowledge+Guide+FINAL.pdf (ifc.org) In-depth guides on SCF are available from the International Finance Corporation
Trade Finance Global Supply Chain Finance | 2023 Guide | Trade Finance Global
Trade4MSME Guide Trade Documents for Exports
World Bank Group: International Finance Corporation World Bank Document comprehensive guide to Supply Chain Finance by Development Banks and Public Entities
SME (Small and Medium Enterprises) Finance Forum: An in-depth presentation on SCF. The recorded course is available here Supply Chain Finance Training Series – IFC & SME Finance Forum on Vimeo