(1) What is the definition of supply chain finance?
(2) How does supply chain finance work?
(3) What are the advantages of supply chain finance?
CRX Markets Glossary
The financing instrument Supply Chain Finance (SCF) enables companies to free up liquidity in their own supply chains by actively supporting the non-recourse sale of their liabilities to suppliers via a financing partner such as banks or institutional investors. In this process, the supplier benefits from early payment of his invoice. The early payment of its outstanding receivable by a financing partner gives the supplier flexibility through liquidity. Supply chain finance thus not only reduces the risk of supply chain disruption, but also enables suppliers to optimize their working capital. Supply chain finance is also known as reverse factoring. While in factoring programs the supplier initiates the financing, reverse factoring is usually offered by the buyer. Financing costs are based on the credit rating of the buyer. Suppliers, especially smaller suppliers, benefit here from the credit rating or valuation of the buyer. The better the credit rating of the buyer, the more attractive the financing conditions. Supply chain finance should not be confused with dynamic discounting. Whereas supply chain finance uses external liquidity for early payment of the company’s own invoices, dynamic discounting uses the company’s own funds or its own surplus liquidity.
To set up a supply chain finance offering, the buyer enters into an agreement with a digital working capital optimization provider with a supply chain finance or reverse factoring product offering. Once integrated into the digital marketplace, the buyer invites its suppliers to join its own supply chain finance program. They are now connected to the platform as part of a digital onboarding process. Suppliers already participating in another buyer’s existing supply chain finance program can easily join additional programs via an informal invitation and a simple contract amendment. The number of suppliers is infinitely scalable and easy to implement due to the process automation of the integration. The more suppliers follow the same marketplace, the better programs scale from both a buyer and supplier perspective.
(A) The supplier shall deliver the goods ordered by the buyer and issue the invoice.
(B) The buyer and thus the debtor releases the invoice after receipt and inspection of the goods and confirms his corresponding liability via upload to the digital marketplace.
(C) If the supplier wishes to make use of early settlement of the invoice, he marks this via his access and thus offers his claim for sale without recourse.
(D) Now financing partners active in the program (banks and institutional investors) can submit their offer to purchase the invoice. The best offer is awarded the contract. If the buyer chooses a pure multi-bank program, the auction is omitted in favor of syndicated financing, i.e., more than one financial institution participates in providing the financing. Regardless of the program, the terms of the debt purchase are based on the creditworthiness or risk assessment of the buyer.
(E) Under the purchase, the supplier receives the discounted invoice amount early, i.e., well before the expiry of the payment term agreed with the buyer.
(F) At the time the invoice is due, the buyer or debtor repays the nominal amount of the invoice to the financing partner.
(G) All process flows are automated throughout the digital marketplace and presented transparently to all parties involved (buyer, supplier, financing partner).
Strengthening your supply chain
Supply chains are becoming increasingly complex. Keeping your suppliers liquid is an important factor in minimizing risks in this chain. Through the early payment of outstanding receivables by a financing partner, buyers give their suppliers flexibility. The supply chain is strengthened in the long term. The relationship with their own suppliers is improved without neglecting their own interest in extending their payment terms.
Optimizing cash flow
With supply chain finance or reverse factoring, the buyer provides his suppliers with liquidity at an early stage by selling his (the supplier’s) receivables to a financing partner without recourse. The days sales outstanding (DSO) are reduced, working capital is improved. The buyer himself pays the financing partner according to his negotiated payment terms and thus preserves his own liquidity. Both sides can optimize their cash flow in this way.
CRX Markets is Europe’s leading marketplace for working capital financing. The digital marketplace brings companies and financing partners (banks, investors, factoring companies) together. Companies can optimize their cash flow by financing their receivables (sale of receivables / factoring) or by financing their payables (reverse factoring). Financing partners can acquire receivables from companies at attractive returns and expand their customer base. The CRX marketplace for working capital financing convinces through