Companies often have a large amount of capital that is tied up in working capital, which does not generate any return or provide any growth investments. This can be a major problem for businesses, especially under the current market situations, as it prevents them from utilizing their resources to the fullest and meanwhile increasing the potential borrowing needs at a higher interest rate.

One way to reduce the amount of working capital is to extend the payment terms with suppliers. This allows the company to hold on to their cash for longer periods of time, allowing them to save money and increase their liquidity.

However, when buyers demand longer payment terms (i.e., they take longer to pay their suppliers), it can strain the suppliers’ cash flow and increase their working capital needs. Essentially, the longer a supplier has to wait for payment, the more cash they need to keep their operations running smoothly.

Supply chain finance, also known as reverse factoring, can help address this issue. Essentially, supply chain finance is a financial instrument that allows buyers to extend their payment terms to suppliers without adversely affecting the suppliers’ cash flow. Here’s how it works:

1. The supplier sends an invoice to the buyer as usual.
2. The buyer approves the invoice and sends it to a financing company (usually a bank).
3. The financing company pays the supplier early, minus a small fee.
4. The buyer repays the financing company according to the agreed-upon payment terms.

In this way, supply chain finance effectively shifts the burden of financing from the supplier to the financing company. The supplier gets paid early, improving their cash flow and reducing their working capital needs, while the buyer gets to extend their payment terms without negatively impacting their supplier relationships.

Overall, supply chain finance is a win-win solution for both buyers and suppliers. Buyers get to manage their cash flow effectively, while suppliers get the financing they need to keep their operations running smoothly.

Find out more in this video how the Kyriba’s cloud-based enterprise liquidity management platform facilitates this process for buyers and sellers.