Supply chain financing is also known as vendor financing or reverse factoring. The term “supply chain” in this context is used to refer to the network of organizations and activities involved in the production, distribution, and payment for goods and services provided by one or more suppliers to a single customer. For example, a large company supplied by numerous smaller companies. “Supply Chain Financing” means the provision of financing to a number of supplier businesses, within a single supply chain, under an umbrella agreement initially established by the customer at the top of the supply chain.

An example of Supply Chain Finance would be where a supermarket purchases products from a wide range of smaller suppliers. The supermarket will arrange a supply chain finance agreement with a financier so that all of its suppliers have the option of accessing finance under the umbrella agreement. This is often provided at competitive prices that reflect the size of the supermarkets’ business rather than the size of the individual suppliers’ businesses. In this way, providers benefit from the agreement, as they can access financing at much lower rates than they would normally be able to achieve in their own right.

Some arrangements may be as simple as financing the outstanding sales invoice to a supermarket or similar large company, but in some cases there may be other services built into the arrangement to help better manage the entire supply process.

The benefits of supply chain finance
The benefits of Supply Chain Finance for large companies that organize it with respect to their suppliers is that they can enjoy credit periods from their suppliers. These are financed at competitive rates that their individual providers may not have been able to achieve on their own. This will encourage your suppliers to continue to provide that level of credit when they otherwise would not have been able to pay for it.

The key benefit from the perspective of suppliers within the agreement is that they can access financing at rates that would normally be reserved for businesses that are much larger, for example national or global supermarket chains.

In recent times, we have seen some examples of these types of agreements being set up by some of the major companies and these types of agreements can be provided by a number of financiers who also provide more traditional invoice financing and factoring services.

Alternative to supply chain factoring and reverse factoring
However, a Supply Chain Finance or Reverse Factoring deal may not always be the right answer for a particular provider, as there can often be other issues that cause a provider to seek a facility that is independent of their customer. An example might be not wanting your funding to be connected to your customer. Adoption of a supply chain finance arrangement may not be unanimous among providers to a particular business and each situation should be reviewed on its own merits and compared to other options available independently within the market.

The future
Although supply chain finance appears to have taken off relatively slowly in the UK, so far there are examples of new deals emerging and the product is likely to appear more and more on the invoice finance market.