Supply chain finance (“SCF”) is an advanced financial solution that accomplishes two primary goals: suppliers get paid more quickly but at a slight discount, and buyers preserve their days payable outstanding (“DPO”) and cash on hand. At its core, SCF is an early payment discount technique that uses third-party capital, typically from a financial institution or third-party lender, to pay an invoice early (instead of internal buyer funds). The early payment is sometimes scheduled and processed the instant an invoice is approved. This allows a supplier to receive its money on a pre-selected schedule at an agreed-upon discount, while the buyer pays the third-party the full cost of the invoice at the original maturity date.
SCF also increases the buyer’s free cash flow through extending payment terms, which can generate higher, mostly risk-free returns as well as enhance corporate liquidity. Improved liquidity can make the enterprise more equipped to deal with financial risks in the short term, and also bolster the organization’s long-term financial health. Depending on the SCF provider, the buying organization could also receive rebates as an incentive to increase volume.
Since the credit risk in the transaction for the third-party financer is tied to the buyer instead of the supplier, SCF can be an innovative way for large enterprises to help their suppliers access credit and improve cash flow at a below-market cost. In these transactions, both buyers and suppliers “win.” Suppliers are paid early and buyers are able to delay payment without impugning the relationship. Invoices paid with supply chain finance thus create a “float” for the enterprise and obviate the choice between paying suppliers early and maximizing DPO.
That is where the true value of supply chain finance lies – in creating a “win-win” situation where buyers are able to deepen the supplier relationship and improve their financial results at the same time. Supply chain finance acts as a third option in what has historically existed as a binary decision point. With SCF, enterprises can maintain their high reputation among the supply base while also preserving, or improving, financial results. It is worth noting, however, that SCF is far from a panacea, and is most often used as one of a number of innovative financial solutions leveraged within a richly-detailed cash management strategy. This does not negate its value, however, which can be – and frequently is – significant.
The Technology Landscape
B2B payments have risen as a “new” and viable source of value for financial organizations. The emergence of electronic payment (“ePayment”) solutions has further driven a fresh and renewed interest in the B2B payment arena. Organizations are paying more attention to this aspect of the AP function and realizing they can take advantage of the efficiencies created. Collectively, these notions have pushed “extended financial value” platforms within the financial ecosystem, such as SCF, into a new and strategic limelight. The emergence of ePayment solutions has also meant an increased interest in the B2B payment process generally. This has resulted in greater interest in payments, which is now becoming an area of strategic importance.
The proliferation of cloud-based supply chain finance solutions in recent years has opened the door to a wider array of buyers that are often eager to benefit from the ability to maximize DPO without the negative reputational impact of extending payment terms. This does not mean that adding SCF to the roster of financial solutions is advisable without careful consideration of the enterprise’s technology infrastructure as well as its overall cash management goals. As with other new solutions and processes, enterprises must develop a roadmap for implementation that includes understanding current processes and involves all relevant stakeholders.
Current global financial conditions dictate that businesses find alternative avenues to boost liquidity and optimize cash management. Supply chain finance has become a viable option for those companies seeking new cash management strategies that can ease the tension of cash management and provide the greater organization with enhanced visibility and access to capital. SCF programs that improve their supplier relationships create one of the few “win-win” propositions in the business world, and the increase in cloud providers offering the solution class has opened up the door for new enterprises to take advantage of this innovative cash management method.