Supply Chain Financing

Supply chain

 

Supply chain is the link between the suppliers of the company --> company itself --> distributors --> customers etc. This chain also includes some other related parties connected to the sourcing, production distribution etc activities. Example of other parties who might be connected to the supply chain are: agents, factors, transportation company etc.

When a company collects finance from the supply chain for its operation, the finance is called 'supply chain finance'. Supply chain finance is mainly short term and it is used to finance the working capital requirement of the company in general. 

 

Trade payables:

The most common example of supply chain finance is the trade payables. Company can obtain products or raw materials from the suppliers on credit. This is short term sources of finance typically with a credit period of 30 days to 90 days. Trade credit is easily available for the companies and it doesn't have any visible interest cost. And therefore, this is one of the most preferred source of finance for working capital.

 

Advance from customers, agents, distributors:

Depending on the industry sometimes company is able to collect advance payment from customer. This is available when customer needs to pre-order the product. May be it is also possible to raise some money from the distributors in the form of licensing or security deposit.

 

Reverse factoring: 

If company takes factoring service then often time factors offer financing service alongside receivables administration. The arrangement could be like, the factor will advance 70% to 80% of the receivables balance, which is paid to the company in advance. This means company doesn't need to wait till the due date of the receivables. This enhances the liquidity of the company greatly, and company will be able to pay supplier on time. However,  company needs to also be mindful about the cost of such financing. 

Comments

Ariful islam's picture
Ariful islam | Sun, 09/01/2019 - 00:21
well written.. i m so much cleared up by reading this.