How Does Supply Chain Financing Help Business Relationships?

Posted by Ryan Howard on Apr 1, 2022 2:37:28 PM

How Does Supply Chain Financing Help Business Relationships

A solid cash flow is essential to the success of any growing business. Good relationships with your business partners are just as important. Supply chains involve several businesses along a network to provide an end product to a customer. If any payments are delayed along the way, it can cause tension within the relationships and challenges with the manufacturing process. 

One way to mitigate these challenges is through supply chain financing. What is it, and how does it help business relationships?


Factoring vs. Financing

Factoring is one option for helping businesses that require immediate cash flow.  Pending invoices can be used as collateral when borrowing against a credit line held by a bank or factoring company. When the customer pays the invoice, the business pays back what was borrowed (plus fees). Another option is to sell accounts receivable at a discount to a factoring company. The factoring company gives the business cash for a large percentage of the receivables but holds the rest (minus fees) until the customer pays them. 

Supply chain financing, often referred to as reverse factoring, happens when the party supplying the cash is the buyer instead of a bank or factoring company. Collect More Cash With A/R Clean Up

How does Supply Chain Financing Work?

Let's say that Amazon wants items to sell on its marketplace. At a basic level, they could finance what's owed to the supplier of the items, paying invoices as soon as they're approved with excess cash or a line of credit.  The supplier can choose which invoices they would like paid early, and the payments are submitted to them, minus any fees.  

Some large corporations have their own supply chain finance (SCF) programs and others work with funders to provide the service.  With supply chain financing, buyers can extend supplier payment terms, get early payment discounts, and buy more products.  Suppliers get their invoices paid earlier. SCF funders work with both so that the supply chain relationship is less strained and working capital is available for both.  

B2B Relationships Are Challenging

Money can put a strain on any relationship and business-to-business relationships are no different. When company survival depends on cash flow, not getting paid on time is a serious offense. Proper accounts receivable management can reduce the risk of late paying invoices, as well as supply chain financing. If your business needs improved cash flow, make sure to work with partners who understand your industry, protecting your brand and the importance of your long-term relationships.COLLECTIONS + BRAND PROTECTION

Topics: Accounts Receivable, Business relationships