Supply Chain Financing, How to Choose the Best?

Supply Chain Financing, also known as supplier financing or reverse factoring, is a financing solution where suppliers can receive early payment on their invoices. SCF reduces the risk of supply chain disruptions and enables buyers and suppliers to optimize their working capital.

Unlike other receivables financing techniques such as factoring, Supply Chain Financing is arranged by the buyer, not by the supplier. Another key difference is that suppliers can access SCF at a funding cost based on the buyer’s credit rating, not their own. As a result, suppliers can usually receive SCF at a lower cost compared to other financing methods.

The term Supply Chain Financing is also sometimes used generically to describe a broader range of supplier financing solutions, including solutions such as dynamic discounting, where the buyer funds the program by allowing the supplier to access early payment on invoices in exchange for early payment discounts. However, the term is more often used as a synonym for reverse factoring.

How does Supply Chain Financing Work?

The buyer will enter into an agreement with the Supply Chain Financing provider and will then invite its suppliers to join the program. Some SCF programs are funded by a single bank, financial institution, or alternative finance provider, while others are run on a multi-funded basis by technology specialists through a dedicated platform.

While buyers have traditionally focused on onboarding their 20 or 50 largest suppliers, technology-based solutions now allow companies to offer SCF to hundreds, thousands, or even tens of thousands of suppliers across the global supply chain. This is made possible by providing an easy-to-use platform and a simplified supplier onboarding process that makes it easy to onboard large numbers of suppliers quickly and with minimal effort.

Once the Supply Chain Financing program is up and running, suppliers can request early payment for their invoices. From there, the SCF process runs, which usually looks like this:

Supply Chain Financing Process

1. Buyers purchase goods or services from suppliers
2. The supplier issues its invoice to the buyer, with payment due within a certain number of days (e.g., 30 days, 60 days, or 90 days)
3. Buyer approves invoice for payment
4. Suppliers request early payment on invoices
5. Funders send payments to suppliers, with a small fee deducted
6. Buyer pays funder on invoice due date

In terms of accounting treatment, buyers implementing SCF programs need to ensure that SCF is classified as a balance sheet arrangement, not a bank debt.

Banks that can do Supply Chain Financing

Bank Indonesia is the central bank of the Republic of Indonesia responsible for managing monetary and ensuring financial system stability. Bank Indonesia does not directly do Supply Chain Financing (SCF), but some private banks in Indonesia may do SCF. Supply Chain Financing is a process where banks or other financial institutions provide loans to companies to finance the supply of products or raw materials. It helps companies to overcome liquidity issues and expand capacity to improve productivity and efficiency. Here is a list of some financial institutions in Indonesia that conduct SCF:

1. Bank Mandiri
2. Bank Central Asia (BCA)
3. Bank Rakyat Indonesia (BRI)
4. Bank Negara Indonesia (BNI)
5. Bank CIMB Niaga
6. Bank Danamon
7. Permata Bank
8. Bank Syariah Mandiri
9. OCBC NISP
10. Standard Chartered Bank

Notes: This list may not include all financial institutions that conduct SCF in Indonesia and policies and products may change from time to time. We recommend contacting your bank or financial institution for the latest information on SCF products and policies.

Advantages of Using Supply Chain Financing

There are several advantages for companies that use SCF when viewed from two sides:

Supplier-wise

Here are some of the benefits for suppliers using SCF:

1. Improving liquidity: SCF helps suppliers to obtain funds to finance production and delivery of goods, thereby improving liquidity and ensuring suppliers have sufficient funds to meet demand.
2. Reducing credit risk: SCF transfers credit risk from the supplier to the bank or financial institution, helping suppliers to reduce credit risk and ensuring they don’t lose money if customers fail to pay invoices.
3. Improving the ability to meet customer demand: SCF helps suppliers to fulfill customer demands efficiently and quickly, strengthening customer relationships and helping to build a good reputation.
4. Expanding production scale: SCF helps suppliers to expand production scale and meet market demand, helping to strengthen their position in the market and strengthen revenue.
5. Reduced costs: SCF helps suppliers to reduce costs, as they can finance the production and delivery of goods with cheaper loans compared to using their own funds.

Supply Chain Financing can help suppliers to improve liquidity, reduce credit risk, and strengthen their position in the market. It also helps build good relationships with customers and helps strengthen their reputation.

From the Buyer’s Side

Here are some of the benefits for buyers using SCF:

1. Expanding supply range: SCF helps buyers to expand their supply range and source products and raw materials from suppliers further afield.
2. Increased payment flexibility: SCF allows buyers to extend payment terms, extending the time to obtain funds and strengthening liquidity.
3. Maintaining good relationships with suppliers: SCF helps buyers to fulfill their payment obligations in a timely manner, helping to build good relationships with suppliers and strengthen their reputation.
4. Maintain product availability: SCF helps buyers to ensure availability of required products and raw materials, strengthening business operations and ensuring continuity of supply.
5. Reduced costs: SCF helps buyers to reduce costs, as they can extend the repayment period and finance the purchase with cheaper loans compared to using their own funds.

Supply Chain Financing helps buyers to expand their supply range, extend payment terms, build good relationships with suppliers, ensure product availability and strengthen their liquidity.

What is Discounted Supply Chain Financing?

Discounted Supply Chain Financing is a financial service that helps companies overcome liquidity constraints by financing their purchases from suppliers. In Discounted Supply Chain Financing, companies sell their invoices (or bills of exchange) to banks or other financial institutions at a discount. The bank or financial institution pays the supplier and collects payment from the buying company when the invoice is due.

With Discounted Supply Chain Financing, buying companies can obtain immediate cash, extend payment terms to suppliers and strengthen their liquidity. It helps companies to finance the purchase of products or raw materials needed for their business operations without having to use internal funds or extend debt to banks. Discounted Supply Chain Financing also helps companies to fulfill their payment obligations on time, build good relationships with suppliers and strengthen their reputation.

How to Choose Supply Chain Financing?

Here are some tips to choose the right Supply Chain Financing for your company:

1. Identify the need: Determine what you need from SCF, such as immediate cash, extended payment terms, or strengthened liquidity.
2. Compare options: Compare the different SCF options available, such as invoice discounting, loans or credit facilities. The comparison should take into account the cost, term and other conditions that suit your needs.
3. Evaluate reputation: Make sure to choose a financial institution or bank that has a good reputation and meets applicable regulatory standards.
4. Talk to suppliers: Discuss the SCF plan with your suppliers to ensure that they support and understand your plan.
5. Read the documents carefully: Be sure to read and understand all applicable documents and terms before deciding to use SCF.
6. Talk to a professional: Consult a financial professional or business expert to ensure that your choice suits your business needs and meets applicable regulations.

By considering these factors and consulting with a professional, you can choose the right Supply Chain Financing to help strengthen your business operations.

Well, TransTRACK also offers you solutions to support an optimal supply chain by using  Fleet Management Systems. Optimize the use of your fleet by scheduling, tracking in real time, and increasing utility and safety digitally with FMS from  TransTRACK!

Topic