Because of Globalization, the trade volume between countries grown multi-fold in the recent years. The main issue faced by the multinational buyers and suppliers is to unlock the potential of working capital struck in the supply chain transits. To overcome this problem, supply chain finance is used. It is also called as supplier finance or reverse factoring. It is usually offered by financial institutions such as banks, where they act as a bridge between the buyer and suppliers, where the financial institution accelerates the payment to the suppliers, in an exchange for some percentage of the fee for the service they offer.

The main advantage of supply chain financing is, the buyer has less burden in order to find the working capital and the supplier gets additional operating cash flow for their business. It greatly reduces the risk in the supply chain process for buyers and suppliers.

Things to Know about Supply Chain Finance / Reverse factoring:

• Supply chain finance is not a loan – It is an entity of buyer’s accounts payable and it cannot be considered as financial debt. In case of a supplier, it is represented as a real sale of their accounts receivables.
• It is not required to be the same financial institution or bank which provides supply chain financing. There could be integrations of multiple financial institutions in getting a single supply chain finance.
• Supply chain finance is not factoring.
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• This solution is usually used by large corporations and also SME suppliers with great credit rating could also get benefitted by these solutions.

How supply chain finance/ reverse factoring work?

• The supplier sends the invoice to the buyer in a usual way.
• The buyer approves the invoice and sends it to the financial institution offering supply chain finance.
• Once the financial institution approves the invoice, either the fund gets deposited to your account or you can trade the approved invoice for advance payments for a small fee.
• If the supplier wants to realize the payment before the date of 100% maturity of the payment, the payment will be immediately transferred to the supplier. There could be a small service charge for the supplier as he gets paid before the date of maturity. But the risk is entirely on the buyer. When he pays after the invoice maturity trade, there will be an interest rate to be paid by the buyer, which is 10 times lesser than the factoring fee.