What is supply chain finance and how does it use invoice data?
Supply chain finance (SCF) is a set of financing solutions that optimize cash flow for buyers and suppliers in a supply chain. Reverse factoring, the most common SCF structure, allows suppliers to receive early payment on approved invoices from a bank or finance platform at the buyer's favorable credit rate. The buyer extends its payment terms while the supplier improves cash flow. Structured e-invoice data is the operational foundation of SCF programs.
How does a reverse factoring supply chain finance program work?
Reverse factoring program structure: (1) Buyer establishes an SCF facility with a bank or fintech platform; (2) Supplier submits invoice to buyer; (3) Buyer approves invoice in their AP system; (4) Approved invoice data feeds to SCF platform; (5) Supplier views approved invoices on platform and selects those to accelerate; (6) SCF platform pays the supplier (minus a small discount); (7) Buyer pays the SCF platform on the original invoice due date. The discount rate reflects the buyer's credit rating, typically well below the supplier's own borrowing rate.
Frequently Asked Questions
- What size of business can benefit from supply chain finance programs?
- SCF programs are most common among large companies as buyers (who can offer attractive credit-based discount rates) and their mid-size to large suppliers. Micro-suppliers may not find SCF platforms worth the onboarding cost for small invoice amounts. Fintech platforms have expanded SCF access to smaller supplier pools by reducing platform fees and simplifying onboarding. SME suppliers to large retailers, manufacturers, and government entities benefit most from SCF programs.
- How does dynamic discounting differ from reverse factoring?
- In dynamic discounting, the buyer uses its own cash to fund early payment and earns a return on the discount offered to suppliers. In reverse factoring, a third-party bank or financier provides the funding and earns the discount. Dynamic discounting is more flexible (no third-party involved, terms set by buyer) but requires the buyer to have surplus cash. Reverse factoring is off-balance sheet for the buyer and doesn't require buyer cash; it is funded by the finance provider.
Related Concepts
- What is reverse factoring and how does it connect to invoice compliance?
- What is dynamic discounting and how does it relate to invoice processing?
- What is invoice discounting and how does it differ from factoring?
- What is DPO (Days Payable Outstanding) and how does it relate to invoice management?
- What is invoice financing and what are the main types?