What is Supply Chain Financing?
If you are a small business owner who supplies goods or services to large customers, you may be able to obtain needed cash flow through supply chain financing.
Supply chain financing, also known as reverse factoring, is a form of factoring in which the high credit standing of a large purchaser is substituted for the credit rating of a supplier to achieve a lower factoring cost to the supplier.
Reverse factoring is typically a three-way relationship among a supplier, a large customer, and a factoring firm. The customer in effect pre-approves invoices from a given supplier and commits to paying the invoices. Because of the customer’s higher credit rating, the factor is willing to conduct the transaction at a lower fee to the supplier. The factor pays the supplier based on the customer’s credit and will then collect on the invoice from the customer.
Benefits on Both Sides
In this relationship, the supplier gains by obtaining immediate cash flow for working capital purposes while paying a lower factoring fee. Further, if the supplier has a particularly weak credit history or poor current and projected financials, it benefits through reverse factoring by gaining access to credit that it might not otherwise be able to obtain.
The large customer can also benefit from reverse factoring transactions. Because the customer is de facto lending its support to the supplier, the supply chain is enhanced, reflecting the reduced risks of the supplier not being able to deliver the product in a timely manner. The customer also typically gains, as the factor is usually willing to allow the customer a somewhat longer time period to pay down the invoice. Furthermore, the reverse factoring transaction strengthens the relationship between the customer and the supplier. As a result, the customer could be in a better negotiating position with respect to the terms of the current and future transactions with this supplier.
While there has been a great deal of discussion about supply chain financing in recent years, growth has been relatively slow. There have been technical difficulties, as well as a general reluctance to move forward.
However, the demand for reverse factoring has been growing on a global basis, and it has been estimated that only about 10% of global demand for such financing is currently being met. Many in the financing industry are now working on efforts to grow these types of transactions, and the trend may accelerate in the next couple of years.
You Can Avail Yourself of Supply Chain Financing Now
Despite the slow growth of supply chain financing, some firms are currently providing reverse factoring facilities to their small business clients.
Paragon Financial has been providing factoring services to small businesses for over two decades. It has now begun to provide reverse factoring as an additional service to its clients.
Your firm may be able to benefit from supply chain finance, both in terms of a reduced financing cost as well as a strengthened relationship with your large-company clients. It may be worth your while to contact us to discuss this form of funding your cash flow requirements.