Supply Chain Finance commonly known as (SCF) is a type of supplier finance which enables the supplier to cash his receivables early than the actual payment date, thereby freeing up its working capital. With working capital being freed up, supplier can roll its capital for production of goods to honor the next purchase order.
It also benefits the buyer of the trade, as the buyer can obtain a short term credit at lesser cost and get their payment terms extended. With longer duration of payments, the buyer gets time to convert its goods into sales and finally pay the bank.
• Suppliers are paid early
• Buyers can extend their payment terms
• Financial Institutions get their fee income at less risk and less cost.
SCF requires the involvement of a SCF platform which enables the interaction between all the parties of the trade. SCF also needs an involvement of external finance provider i.e Bank who settles supplier invoices in advance or on due date of the invoice, for a lower financing cost than the suppliers’ own source of funds.
When the external finance provider extends finance, it can be at the request of supplier or at the request of buyer by earmarking the credit limits of the concerned party. Different types of finances come into picture depending upon the party requesting for finance.
A Program is a linkage of a buyer to multiple suppliers or a supplier to multiple buyers.
Two types of Program exists in SCF:
• Supplier Centric Program - When Supplier is the large corporate, the buyer whom supplier is dealing with becomes the Counter Party/ Spoke and ‘Supplier’ becomes the‘Anchor’of the SCF Program. Such a program is calleda ‘Supplier Centric Program’. The anchor links all his counter parties or spokes to the SCF Program.
• Buyer Centric Program-When Buyer is the large corporate, the seller whom buyer is dealing with becomes the Counter Party/Spoke and ‘Buyer’ becomes the‘Anchor’of the SCF Program. Such Program is called‘Buyer Centric Program’.The anchor links all his counter parties or spokes to the SCF Program.
