A Complete Guide to Supply Chain Finance

Liquidity is a desirable quality in the modern supply chain landscape. With demand for goods and services at an all-time high, businesses rely on a streamlined supply that maintains cash flow fluidity – and that’s where supply chain finance comes in.

In this guide, we’re taking a detailed look at supply chain finance, from what it is and how it works, to the benefits it can offer to both buyers and suppliers. Use the links below to navigate or read on for the complete guide.


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What is Supply Chain Finance?

Supply chain finance (SCF) is a term used to describe a set of solutions that optimise financial distribution along a supply chain. It allows businesses more flexibility in its payment terms, which can lead to lower financing costs and greater efficiency between companies and customers.

The purpose of SCF is to provide greater cash flow liquidity to suppliers and businesses. Through it, transactions, invoice approval and settlement are tracked and automated, optimising the efficiency of working capital throughout the supply chain.

As a monetary business solution, supply chain finance offers credit to buyers on a short-term basis. This means that the supplier can move more quickly since their invoice is settled by a bank (known as a ‘factor’ in this scenario), which subsequently minimises lead times for the buyer and means they can enjoy more flexible payment terms to the bank in question.

SCF is considered a modern replacement to traditional forms of business capital finance, like short-term trading assets, factoring and invoice discounting. Though still in use by many organisations, such methods do have their downsides compared to SCF – including variable funding availability, high lender fees and invasive borrower auditing.


warehouse managers talking


How Does Supply Chain Finance Work?

For the uninitiated, supply chain finance can be difficult to get your head around. But with plentiful advantages on offer, it’s worth taking the time to get to know the process and how it could benefit your business in the long term.

Let’s begin by looking at the two main types of SCF: ‘supplier initiated’ and ‘buyer initiated’.


What is Supplier Initiated SCF?

Supplier initiated SCF is a programme whereby suppliers sign up to a finance agreement that allows them to request payments on approved invoices at a time that suits them. The lender makes this payment, and then arranges repayment with the buyer – ensuring flexibility for all parties.


What is Buyer Initiated SCF?

Buyer initiated SCF works in much the same way as the supplier-initiated programme but in reverse. So, the buyer instructs the lender to make a payment directly to the seller, either on or before the invoice due date. Then, the supplier dispatches their goods earlier than planned, improving the efficiency of supply while ensuring monetary liquidity between both stakeholders.

Now that we’ve looked at supplier initiated and buyer-initiated supply chain finance, you should have a clearer understanding of the process. But, just to make sure, here’s a breakdown of SCF in action (based on the supplier-initiated methodology):

  • The buyer places an order with its partner supplier
  • Traditionally, the supplier would ship the goods and then invoice the buyer, typically with 30-day payment terms
  • Instead, the supplier requests immediate or early payment from the buyer’s financial intermediary
  • The finance company settles the invoice on the buyer’s behalf
  • The buyer’s payment terms then increase from the typical 30-day period to the terms set out by the bank – this is usually upwards of 60 days


woman working at her office desk


To benefit from the cash flow liquidity afforded by SCF, a business must first sign up to an invoice finance facility offered by some specialist banks, lenders and institutions; these products are often known as Selective Invoice Financing.

Typically, such agreements last one to two years, and the amount a business can lend over that period will depend on their credit rating and buying power. Thus, maintaining good financial standing is essential if you’re a business owner looking to take advantage of supply chain finance.


What Are the Benefits of Supply Chain Finance?

Whether buyers or suppliers, businesses reliant on cash flow liquidity and rapid lead times stand to benefit enormously from an SCF programme. What’s more, transaction-heavy enterprises can automate the SCF process, further improving the efficiency of their supply chain.

Here, we look at the benefits of supply chain finance, both for buyers and suppliers.


SCF Benefits for Buyers

  • Shorter Supply Lead Times – with the option to settle invoices immediately, buyers can enjoy shorter lead times on the goods they purchase from suppliers. This is something that can be easily negotiated between the two parties, improving the efficiency of supply and reducing time to market.
  • Improved Supply Chain Relationships – prompt payments help buyers establish healthy relationships with suppliers and partners, generating trust and good faith. This can, in turn, lead to secondary benefits such as discounts or priority shipping.
  • Stability of Supply – given that suppliers are paid promptly for goods purchased, they’re better placed to offer a consistent and reliable supply – providing greater assurance to buyers.
  • Increased liquidity – SCF provides buyers with greater liquidity and flexible payment terms, so they can benefit from a healthier and more controllable cash flow.


colleagues talking


SCF Benefits for Suppliers

  • Faster Payments – the key benefit for suppliers is, of course, faster payments. No longer hampered by customary 30-day terms, suppliers can request immediate payments, bolstering their cash flow and enhancing liquidity.
  • Flexibility – remember, suppliers have a choice over the invoices they request immediate payments on, offering greater flexibility and control over their cash flow.
  • Better Customer Relations – suppliers can enjoy a more mutually beneficial working relationship with buyers, providing a prompt and efficient service. This, in turn, can help generate new custom, and maintain valuable long-term contracts.
  • Efficiency Through Automation – having the ability to automate invoice management frees suppliers from administrative constraints, so they can focus on delivering a better service for their customers.


Reverse Factoring: What is it and How Does it Relate to Supply Chain Finance?

If you’ve researched supply chain finance in the past, you may have come across the term ‘reverse factoring’. But what does it mean? And how does it relate to standard SCF?

Reverse factoring is a form of SCF that’s typically offered by specialist financial services and used by large corporations. It’s a way to avoid credit showing up as debt on a business’ balance sheet, which can be incriminating from a shareholder perspective.

For this to happen, a bank essentially buys invoices from the supplier, before setting up a repayment plan with the buyer. Therefore, it doesn’t appear in the buyer’s ledger, meaning they make substantial purchases without it showing up as debt.

Typically, reverse factoring is available only to large businesses with a very high credit score. It’s also considerably more complicated than a standard SCF agreement, with several more reporting and auditing hoops to jump through for the system to work in the favour of both parties.


warehouse managers and workers shaking hands


Key Takeaways and Things to Consider

Have you got your head around supply chain finance? Here are some key things to remember:

  • Supply chain finance is used to increase liquidity throughout a supply chain, improving cash flow and payment flexibility
  • SCF can be beneficial for both buyers and suppliers – all parties can take advantage of both supplier initiated and buyer initiated SCF programmes
  • The greatest benefit for buyers is flexible payment terms
  • The greatest benefit for suppliers is faster payments and shorter lead times
  • Reverse factoring is similar to a standard SCF programme, but is typically used by large companies who want to reduce the debt burden on their invoice ledger

We hope you’ve enjoyed this guide on the ins and outs of supply chain finance. For more business-related guides and features, head to the JS3 Global blog.


At JS3 Global, we’re experts in helping businesses get more from their software and systems. Advising on all elements of the enterprise resource planning ecosystem, our specialists can help you choose the appropriate solutions for your business, whether you’re looking to automate processes or unify operational platforms. For more information or to speak to a member of our team, visit the homepage or call us on +44(0)161 503 0866.