2020 has been a hard year for the global community and everyone is trying to come to terms with the current situation. Not only did this pandemic leave people unemployed, but it has also ignited the passion for starting one’s own business.
Although you may still be planning to establish your own business or if you have already, chances are you are looking to sustain it.
You do plan to expand it, right?
If your answer to this is YES, then read further, because we are going to discuss a very important topic that will not only help you grow, but it will help you to manage your finances as well.
Today’s topic is supply chain financing. If you want to learn about it then go ahead and give this piece a complete read.
What is supply chain financing?
For starters, supply chain financing is a process in which organizations use financial models to streamline payment procedures between the companies and their supplying partners.
One of the ways to use supply financing to your benefit is to use supplier finance. It means that the company will purchase the required raw materials – to manufacture the products – from its supplier on credit. To better understand supplier finance, here is an easy example.
If you own a boutique, you will need fabrics, accessories, and some other raw materials to complete the setup. Well, if you are doing a business, you will need to manufacture the product in a bulk quantity. For that, you will need a massive volume of raw materials, and to buy those, you will need an initial investment.
However, you may not have that much finance available right away. With supplier finance, you can buy your required raw materials from your supplier, and then you can pay for them later.
Another way to use supply chain financing in a business is through reverse factoring. To understand the difference between reverse factoring and supplier financing better, know that reverse factoring is post-delivery financing and supplier financing is pre-delivery financing.
Reverse factoring is a process in which a company takes a loan from a financing institution to pay for the raw materials. The process is pretty much simple. If you are a big company and want to protect your and your supplier’s cash flow while maintaining the regular raw material availability, you can get a quote from a financing organization to lend you the amount you need to purchase your raw materials.
Once you receive the loan and are done with the payments to your supplier, you can then return the loan when your manufactured product starts selling. In this way, your supplier won’t have to face any financial burden, and you can also return your loan easily because, in this type of financing, the interest rate is based on customer credits, and not on the overall loan.
As of now, you must have understood two major branches of supply chain financing that are, suppliers finance and reverse factoring respectively.
Business is all about estimating the rewards and costs. In the following paragraphs we will mention the advantages and disadvantages of using both supply chain financing options.
- Pros and Cons of Suppliers financing
If you want to use supplier financing to your advantage, you must consult a supply chain finance organization. A supply chain finance company will become the bridge between you and your supplier. It takes care of your payments and ensures that you receive your supplies as well.
However, you will have to meet some qualifications to be able to receive finances from a supply chain company. Your eligibility will be evaluated on the basis of the following criteria:
- You are a manufacturer or a distributor
- Your business generates more than $2 million annually
- Your operation history for the past three fiscal years
- Your financial statements
- Product liability and credit insurance
If you fulfill the above-mentioned criteria, then you will be eligible to work with a supply chain financing company.
The major advantage of using supplier finance is that it is a pre-delivery financing model, which will allow you to build your inventory and expand your business to different horizons.
However, if you don’t meet the criteria you won’t get supplier financing. Furthermore, the supplier finance only covers the cost of your raw materials. You will have to manage other costs of the business on your own.
- Advantages and disadvantages of using Reverse factoring
For reverse factoring, you will need the supply chain company to finance your business. It is more beneficial for a supplier in a way that he gets his payments without compromising on the cash flow. Moreover, the supplier has to pay a small fee to receive its payment early. The amount of the fee is determined by the creditworthiness of the company. It is unlikely that a large company has excellent creditworthiness. This is why suppliers have to pay small amounts.
However, as much it may be beneficial for the suppliers, it is also a client-driven way of supply chain financing. This means that a company will have to set up a reverse factoring program and offer the supplier. Thus, reverse factoring will only help the supplier with payments from the company that has set up the program – and not with any other payments – until and unless the supplier has its reverse factoring program.
All in all, we have provided you with a detailed overview of supply chain financing and how it can help your business to grow and expand. Now it is your turn to decide which supply chain financing model would work best for you.