Unlike traditional invoice factoring, where a supplier wants to finance his receivables, Supply Chain Financing (or Reverse Invoice Factoring) is a financing solution initiated by the ordering party to help their typically smaller suppliers finance their receivables.
Often, Supply Chain Financing leads to one obtaining funding easily. Also, at a lower cost than what the smaller vendor could get on their own. The Supply Chain Finance or Reverse Invoice Factoring market is still modest, but it is growing at a high rate.
Suppliers are under pressure to provide buyers with better payment terms and pricing. To create a more stable supply chain, a supplier’s customers can sell their accounts payable (the client’s invoices) to a factoring company. Doing so gives the business immediate access to the cash they need.
Supply Chain Finance is important because of the growing need for companies to access the working capital locked up in their supply chains. It allows companies to have longer payment terms with certain suppliers and at the same time, pay larger suppliers early. It’s an optimization of working capital. Interest is lesser because of the 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.