Approximately $1.5T of the trade finance market is subject to a funding gap driven by the retrenchment of banks from lending markets due to regulatory considerations, according to Insight Investment. Sectors that typically utilize high levels of supply chain finance include consumer goods, transportation, and manufacturing.
Supply chain finance is a term used to describe a set of technology-enabled solutions that are designed to both lower financing costs and improve cash flow for buyers and sellers of goods across the globe. Supply chain finance automates invoice approval and settlement processes, from initiation to completion. Buyers agree to approve their suppliers’ invoices for financing by a bank or finance company. Supply chain financing optimizes working capital and provides liquidity to both parties in the trade. Specifically, suppliers gain quicker access to money that they are owed, while buyers get more time to pay off their balances. On either side of the equation, the parties can use the cash on hand for other projects to keep their respective operations running smoothly.
Supply chain finance generally works best when the buyer has a better credit rating than the seller, and can consequently source capital from a bank or other financial provider at a lower cost. This advantage lets buyers negotiate extended payment schedules and the sellers can receive immediate payment from the intermediary financing entity.
Supply chain finance is often referred to as “supplier finance” or “reverse factoring,” because it encourages collaboration between buyers and sellers. This thinking counters the competitive dynamic that typically arises between these two parties. Under traditional circumstances, buyers attempt to delay payment, while sellers look to be paid as soon as possible. With supply chain finance arrangements, however, it is a win-win for buyers and sellers.
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