The Supply Chain Finance Model

Supply chain finance is an excellent way for companies to improve their working capital position. The cooperation between the buyer and the supplier for a quicker cash flow conversion cycle creates a competitive advantage. This occurs through a third-party supply chain finance facility and serves a range of industries.

Why is Supply Chain Finance a Good Model?

In any commercial transaction, the buyer wants to extend their payment terms to improve their cash flow and working capital position, and the seller wants to accelerate the payment terms to improve their cash flow and working capital position. The third-party supply chain finance facility fills that void for a win/win business finance solution, as the supply chain finance facility pays the supplier quickly (for a small fee) and collects money from the buyer within the set payment terms. The buyer is now able to work on better deals with their supplier.

What Is The Media Talking About?

There is currently some negative press surrounding Greensill Capital but that does not mean that supply chain finance is not a very effective financing tool, in fact, the impressive growth of Greensill over the last few years confirms the need for this type of financing. We should not forget that businesses, in particular SMEs, need assistance with funds to pay their bills early to continue their positive cash flow and working capital cycles. As mentioned, when supply chain finance is executed as it should be, it is an excellent model for businesses to improve their working capital position. Therefore, what has occurred at Greensill is not the norm for the industry, and supply chain finance as a whole should be separated out as a good business cash flow solution.

Are There Any Other Cash Flow Benefits?

Because of the very nature of the supply chain, there will always be a seller and always a buyer, and importantly many buyers and sellers form the whole of the supply chain. A good cash flow and working capital solution should therefore also offer elements to support the whole of this supply chain function. For example, when you are a buyer and want to extend payment terms for improved working capital, you might want to use supply chain finance (also known as reverse factoring), and when you come to sell and want to accelerate payments, you might want to use invoice factoring.


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