What is supply chain finance?

Companies often have capital tied up in working capital, which doesn’t generate a return and is unavailable for growth investments.

To gain access to this capital, companies can employ supply chain finance, which gives suppliers the flexibility to “sell” approved invoices to financial institutions. In doing so, buyers can negotiate longer payment terms, meaning that they can hold on to cash longer. By holding on to cash longer, they are generating free cash flow without having to ask for an extended payment term and paying the financial institution at the extended payday.

Supply Chain diagram

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A Sustainable Supply Chain

The need for a code of ethics and responsible sourcing continues to grow as the global supply chain expands. In response to this growth, as well as consumer demands and investor preferences to do business with sustainable companies, an increasing number of companies are instating environment and social governance (ESG) or corporate social responsibility committees in place.

And while many consumers and investors see sustainable businesses as being less risky, it can be difficult to implement and maintain these standards. In addition, there are a lack of incentives – both tangible and financial – for suppliers and as a result they may be non-compliant. In being non-compliant, the suppliers, who are the ones providing the resources to meet the standards, disrupt the standards set forth by the company.

To remedy this, organizations can use supply chain finance as green finance through the association of the financing rate with ESG parameters.

The Benefits of Supply Chain Finance

For buyers, utilizing supply chain finance as a working capital solution provides:
•  Increased free cash flow (increased DPO)
•  Enhanced cash visibility & predictability
•  Reduced account payable inquiries
•  Rewards for bank partnerships
•  Improved critical supplier relationships
•  Financial incentive for sustainability and responsible sourcing

For suppliers, supply chain finance delivers:
•  An increase in free cash flow (decreased DSO) through early payment
•  Enhanced cash visibility & predictability
•  Reduced financing costs
•  Remittance information at no cost with reduced account receivable queries
•  Financial incentives for sustainable and responsible sourcing

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