Running a business comes with many challenges. However, the challenges that revolve around logistics and financing tend to be the most frustrating to deal with. For instance, there are times when paying suppliers on time becomes exceedingly tricky. Similarly, you may find sudden procurement opportunities that require quick money. These situations are faced by almost every business regardless of scale.
Supply chain financing solutions exist, but some entrepreneurs may not be aware of just how useful they are. Today, let us explore how these financing solutions can keep your operations on track.
Leading Supply Chain Financing Models
If you’ve never had to use supply chain financing solutions before, it can be a little confusing to know what to choose. You have traditional loan models from banks, while lenders like Fast Business Financial offer more flexible solutions. Let’s look at some of the most popular options.
Reverse Factoring (Supplier Finance) and Approved Payables Finance (APF)
The first supply chain financing model is reverse factoring. Here, a buyer contacts a third-party financier and arranges for them to pay the supplier early. The buyer can then take their time and repay the financier later based on negotiated terms.
This method ensures that cash flow isn’t affected. The supplier doesn’t have to worry that the buyer will default, and this, in turn, keeps buyer and supplier relationships on good terms. It’s a win-win situation for everyone.
Approved Payable Finance takes a different approach. Here, the focus is on the buyer’s payment obligation. That means the financier relies on the buyer’s legal promise to pay. This promise rarely involves collateral as the approved invoice from a creditworthy buyer serves as a strong enough guarantee.
Like reverse factoring, APF also benefits both parties, with the buyer enjoying extended payment terms and the supplier receiving prompt payments. This leads to great working capital for everyone.
Dynamic Discounting
In this model, buyers take any extra cash they have and pay their suppliers in advance, to receive discounts on the invoice. Conventional early payment discounts tend to be fixed, but this model is dynamic. In other words, suppliers can choose when they want to be paid. The discount they offer is then calculated based on how early they get paid.
Most buyers also prefer this model as it gives them risk-free returns on otherwise idle capital. Meanwhile, the suppliers enjoy faster liquidity and capital without ever having to worry about borrowing externally.
Receivables Purchase & Factoring
This is a financing method where suppliers pass on their receivables (unpaid invoices) to a financier. The benefit here is that suppliers get to cover their operational needs without waiting (sometimes several months) for order fulfillment from the buyer.
This gives your supplier immediate liquidity and allows you to keep your financial reports with no visible debt. This is known as off-balance sheet treatment. You are still paying the financier, but it’s not seen as a loan, as would be the case if you approached a bank.
Deep-Tier Supply Chain Financing
Deep-tier financing aims to support even sub-suppliers and manufacturers who often lack access to affordable credit despite being vital to the supply chain. Deep-tier supply chain financing helps provide funding to the entire supply chain.
However, this can be a complex task given how vast supply chains can be. This is why there is increasing usage of Artificial Intelligence (AI) and blockchain technology in the financing process. AI helps with tasks such as analysis of supplier data, risk, and payment behavior, while blockchain provides transparency via tamper-proof recording of transactions.
Considerations for Choosing a Financing Solution
Understanding the different models available is only half of the process. You also want to ensure that the model you choose is compatible with your needs. Below are some key factors you’ll want to consider.
Creditworthiness of Counterparties
The first factor that banks and lenders will take into consideration is your creditworthiness. This applies equally to both buyers and suppliers. Sometimes, there’s even some co-dependency. For instance, in models like reverse factoring, if you, as a buyer, are creditworthy, the bank or third-party lender may also secure better terms for your supplier.
Technology Integration
Enterprise Resource Planning (ERP) and other real-time tracking software are another area that needs to be taken into account. Unfortunately, many smaller businesses still rely on spreadsheets or manual bookkeeping. If you approach a financier, some of them will expect you to use ERP software or tools that are easily integrated with their systems.
Transaction Volumes and Supply Chain Complexity
Choosing a financing model depends on the scale of your operation, the kind of volume you move, and the inventory you stock. If your business falls into the high-volume category, then a structured APF program might be more effective than something like dynamic discounting. This is because APF programs are designed to support financing not just across many transactions but also across multiple suppliers.
Fee Structures and Cost-Benefit Analysis
As one might expect, each financing model comes with trade-offs that need to be accounted for. This could be service fees, discounts for financiers, or even non-monetary factors that affect delivery time, payment period, and cash flow. There may be times when your business might need urgent financing, and you may not mind high service fees.
If maintaining a steady cash flow is your priority, a model with higher fees but faster payouts can be worth it. However, if your margins are somewhat tight, then it makes sense to opt for a lower-cost model with longer payment cycles.
Alignment with Sustainability Objectives
Today, many businesses have established sustainability goals and objectives. Some businesses may even have received investor funding on the condition that certain sustainability goals are achieved. Conversely, some financiers also offer better terms to businesses that have sustainable policies in place. Thus, when browsing supply chain financing solutions, try to work with financiers who understand your commitments and offer help towards their achievement.
Frequently Asked Questions (FAQs)
Can SMEs benefit from supply chain finance?
Yes. While supply chain financing solutions are often used by large corporations, small and mid-sized enterprises (SMEs) can certainly benefit from them. In fact, many financiers offer programs that are tailor-made to help SMEs, especially those with good creditworthiness.
When do supply chain businesses require financing?
It depends on the situation, but timing mismatches between incoming payments and outgoing expenses are the key factor. You may notice this happening during certain seasons when demand spikes, during bulk buying, and when there are disruptions to the supply chain.
How does dynamic discounting work, and who benefits?
As we covered earlier, dynamic discounting allows you, as a buyer, to make an early payment in exchange for a variable discount. The earlier you can pay, the higher your discount might be. Everyone benefits from this process. You get to enjoy risk-free savings, and your supplier enjoys an early cash-flow influx.
What role does technology play in the latest SCF solutions?
The supply chain financing model relies on the strength of your relationship as a business with other parties in the supply chain. In that context, technology allows everyone to be on the same page. So, as we discussed earlier, technology like blockchain ensures that records are tamper-proof so that trust is maintained between buyers and suppliers.
Are there sustainable or ESG-linked supply chain financing options?
Yes. Many financiers are proponents of Environmental, Social, and Governance (ESG) goals and have their own sustainable agendas. Speak to them about it, and you might discover that they might offer better terms for businesses and suppliers who align with their goals.
Supply Chain Financing Solutions Exist, and Are Ready for You
Many businesses fail to recognize the numerous benefits that come with modern financing solutions. With the right model, you can improve the efficiency of your entire operation. You no longer have to miss out on growth opportunities because you lack financing.
All you have to do is decide if you are willing to accept the help you need to optimize, scale, and grow your business.
Start Reevaluating Your Supply Chain Financing Solutions Today
Funding is crucial for almost every part of a supply chain. We, at Fast Business Financial, are a small-business-friendly, alternative lender and provider of business loans. We offer a number of options, such as term loans, unsecured working capital loans, SBA loans, and more. If you need quick funding to manage your supply chain operations, our simple application process makes financing easier than you imagine.