how supply chain finance works
supply chain finance works best when the buyer has a better credit rating than the seller and can consequently source capital from a bank or other financial provider at a lower cost this advantage lets buyers negotiate better terms from the seller such as extended payment schedules meanwhile the seller can unload its products more quickly to receive immediate payment from the intermediary financing body supply chain finance often referred to as supplier finance or reverse factoring encourages collaboration between buyers and sellers this philosophically counters the competitive dynamic that typically arises between these two parties after all under traditional circumstances buyers attempt to delay payment while sellers look to be paid as soon as possible example of supply chain financea typical extended payables transaction works as follows let s say the buyer company abc purchases goods from the seller supplier xyz under traditional circumstances supplier xyz ships the goods then submits an invoice to company abc which approves the payment on standard credit terms of 30 days but if supplier xyz is in dire need of cash it may request immediate payment at a discount from company abc s affiliated financial institution if this is granted that financial institution issues payment to supplier xyz and in turn extends the payment period for company abc for an additional further 30 days for a total credit term of 60 days rather than the 30 days mandated by supplier xyz supply chain finance has been primarily driven by the increasing globalization and complexity of the supply chain especially in the automotive and manufacturing industries special considerationsaccording to the global supply chain finance forum a consortium of industry associations scf has recently slowed down due to the complicated accounting and capital treatment associated with this practice mainly in response to increased regulatory and reporting requirements 