Supply Chain Finance (SCF) – what is it?
Supply Chain Finance (SCF) is a set of financial tools and solutions that aim to improve the financial liquidity of companies participating in the supply chain. The main goal of SCF is to shorten the payment cycle between suppliers, manufacturers and buyers, enabling more efficient working capital management.
SCF includes various financial instruments that help companies extend payment terms to buyers and, at the same time, ensure earlier payment to suppliers. This benefits both large corporations and smaller companies supplying raw materials or semi-finished products, allowing them to be more financially stable.
Frequently asked questions (FAQ)
1. How does supply chain finance work?
The supply chain finance process starts with a supplier sending goods to a buyer and issuing an invoice. The buyer then approves the invoice but sets a payment term, which can be, for example, 60-90 days. During this time, a financial institution such as a bank or factoring company pays the supplier the funds in advance, minus a small commission. The buyer repays its obligation to the factor according to the original payment date. This solution allows the supplier to get paid faster and the buyer to extend the payment date without negatively affecting the business relationship.
2. What are the main benefits of SCF?
For suppliers, the key advantage of SCF is faster access to funds without having to take out a loan, which reduces the risk of the recipient becoming insolvent and ensures greater financial stability. This allows suppliers to invest in the development of their business and maintain optimal liquidity. For buyers, SCF offers the possibility to extend payment terms without jeopardizing their suppliers, which leads to better working capital and cash flow management. Maintaining strong relationships with suppliers and being able to negotiate more favorable commercial terms are additional advantages of this solution.
3. What are the most commonly used SCF instruments?
Various financial tools are used within the framework of SCF. Reverse factoring is a solution in which a factoring institution finances suppliers on behalf of the buyer, allowing them to receive payment quickly. Dynamic invoice discounting gives suppliers the option of choosing early payment for an invoice in exchange for a small discount. Merchant credit allows buyers to purchase goods on credit with subsequent payment, and working capital loans enable suppliers to obtain short-term financing for the execution of orders.
4. How does SCF differ from traditional factoring?
SCF focuses on the entire supply chain and optimizes the liquidity of both buyers and suppliers, while traditional factoring is initiated by the supplier and involves selling invoices to a factor, regardless of the buyer’s decision. As a result, SCF offers a more integrated approach to managing a company’s cash flow.
5. Who uses SCF the most?
Supply chain finance is mainly used by large corporations with an extensive network of suppliers, manufacturing and industrial companies that need a stable supply of raw materials, as well as the retail and e-commerce sector, where financing large inventories of goods is necessary. SCF is a strategy that allows you to increase financial liquidity, improve relationships between suppliers and buyers, and optimize working capital management, which translates into a more efficient functioning of the entire supply chain.
