Unlike traditional invoice factoring, where a supplier wants to finance his receivables, Supply Chain Finance (or Reverse Invoice Factoring) is a financing solution initiated by the ordering party to help their typically smaller suppliers finance their receivables. Many times this leads to one obtaining a financing more easily. Also, at a lower cost than what the smaller vendor could obtain on their own. The Supply Chain Finance or Reverse Invoice Factoring market is still very small. However, it is growing at a high rate.
Suppliers are under pressure to provide buyers with better payment terms and pricing. In order to create a more stable supply chain, a supplier’s customers can sell their accounts payable (the client’s invoices) to WIP Funding. This gives the business immediate access to the cash they need.
Supply Chain Finance has become important because of the growing need for companies to access the working capital that’s locked up in their supply chains. It allows companies to have longer payment terms with certain suppliers while also allowing them to pay larger suppliers early. It’s an optimization of working capital. Interest is lesser because of early payment of larger orders. It also allows businesses to cash in on potential discounts for paying early from the larger suppliers, on the larger orders. The result is that the buyer has created additional working capital and the risk for all suppliers is minimized.