Every business, no matter the industry or size, relies on one thing: cash flow.

Without this, the business cannot invest in necessary resources to maintain operations. As cash flow slows to a crawl, the company can’t obtain materials to create its products; pay for utilities, rent and other overhead expenses; pay off debt obligations; etc.

So, what’s a company with cash flow restrictions to do when it needs to purchase necessary goods?

The answer for an increasing number of global companies is supply chain finance. Here’s what you need to know about this business process that improves relationships between buyers and suppliers, and gives both parties the liquidity they need to maintain business operations.

What is supply chain finance (SCF)?

Supply chain finance is, by definition, “the use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions.”

 There are multiple strategies and techniques that fall within this umbrella definition. However, they all have the same basic objective: to provide buyers with the goods they need, and suppliers with fast payment in line with their terms, or even earlier.

You might think of this process as a supply chain loan – except, instead of the borrower receiving the funds to spend as they choose, the financier directs the money to a seller / supplier with whom the buyer has already placed an order.

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Supply chain finance vs. financial supply chain

 SCF and the financial supply chain may sound alike, but these are two distinct business concepts.

 While a supply chain finance arrangement is a technique employed to ensure the smooth transaction of business resources between buyers and suppliers, the financial supply chain represents the flow of cash from the buyer to the supplier.

The financial supply chain can be thought of as a complement to the physical supply chain, which represents the flow of goods from the supplier to the buyer.

How supply chain finance works

In a business transaction following an SCF model, there are three parties – buyer, seller and financier – that cooperate like so:

  • The buyer places an order with the seller / supplier.
  • The seller / supplier fulfils the order and invoices the buyer.
  • The buyer approves the invoice and uploads it to the financier.
  • The buyer advises the financier terms to pay on the seller / supplier invoice in line with supplier terms, or earlier.
  • The buyer pays the financier back according to agreed upon terms.
  • SCF will typically NOT require a property to be used as an asset to secure the finance.

This process can give the buyer greater access to credit at an acceptable cost, which allows that company to use that credit to obtain necessary business resources quickly.

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Who can use supply chain financing?

Any company can use SCF. It’s a technique that’s been used by businesses in a variety of industries for decades. A PwC survey found that, among respondents who have an SCF programme in use:

  • 21% were in consumer goods.
  • 14% were in automotive.
  • 14% were in communications and IT.
  • 11% were in energy, utilities and mining.
  • 11% were in industrial manufacturing.
  • 7% were in transportation and logistics.
  • 7% were in professional services.

Historically, these programmes are most common in big business: 65% of European companies that have revenues of $750 million or more utilise SCF. However, the SCF model is gaining momentum in Australia, with 7% of large companies having implemented a SCF programme.

Who benefits from supply chain financing?

All parties in an SCF transaction benefit from the programme. Here are the advantages each participant may realise:

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SCF benefits for buyers

  • Make business purchases when they’re needed.
  • Maintain existing working capital for other business expenses.
  • Choose a payment plan that fits their cash flow.
  • Promote the financial stability of their suppliers.

Buyers in SCF programmes aim to gain easy access to the products they need from a wide variety of companies, and therefore utilise these methods with multiple suppliers. SCF allows them to establish relationships with each of these suppliers in a mutually beneficial way.

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SCF benefits for suppliers

  • Receive payments fast, on time and in full.
  • Improve cash flow necessary for business operations.
  • Limit risk and cost of financing products.
  • Remove overdue accounts and debts from their balance sheets.

Suppliers involved in SCF programmes are often small or medium-sized enterprises with limited access to financial resources in comparison to their typical buyers. SCF allows them to benefit from the buyers’ elevated credit status.

How UnLock’s solutions empower both buyers and suppliers

The key to a successful SCF programme is a digital platform that all parties can use and trust. UnLock’s Payment Gateway delivers payment to suppliers quickly, assuming the risk associated with providing the purchased items to the buyer. Then, the supplier’s buyer network will repay UnLock in 30-, 60- or 90-day terms, depending on the timeline chosen by the buyer.

The extended payment terms give buyers more freedom to use their working capital as needed and offer a solution for cash flow problems for both the buyer and supplier.

To learn more about how you can benefit from UnLock’s Payment Gateway, get in touch with one of our experts today.

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