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Supply Chain Finance & Reverse Factoring

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Supply Chain Finance can also be known as Supplier Finance or Reverse Factoring. The term “supply chain” in this context is used to refer to the network of organisations and activities involved with producing, distributing and paying for goods and services provided by one or more suppliers to a single customer. For example a large company being supplied by numerous smaller businesses. “Supply Chain Finance” refers to the provision of finance to a number of supplier businesses, within a single supply chain, under one umbrella arrangement that has been initially set up by the customer at the top of the supply chain.

An example of Supply Chain Finance would be where a supermarket is purchasing products from a wide range of smaller suppliers. The supermarket will arrange a Supply Chain Financing agreement with a financier such that all of their suppliers have the option of accessing finance under the umbrella arrangement. This is often provided at competitive rates that reflect the size of the supermarkets business rather than the size of the individual supplier businesses. In this way, the suppliers benefit from the arrangement as they are able to access finance at much lower rates than they would typically be able to achieve in their own right.

Some arrangements may be as simple as funding the outstanding sales invoice to the supermarket or similar large business, but in some cases there may be other services bolted onto the arrangement to help improve the management of the entire supply process.

The Benefits of Supply Chain Finance
The benefits of Supply Chain Finance to the large business arranging it in respect of their suppliers is that they are able to enjoy credit periods from their suppliers. These are being funded at competitive rates that their individual suppliers may not have been able to achieve in their own right. This will encourage their suppliers to continue to provide that level of credit when they may not otherwise have been able to afford it.

The key benefit from the perspective of the suppliers within the arrangement is that they are able to access finance at rates that would normally be reserved for businesses that are much larger, for example, national or global supermarket chains.

In recent times we have seen a few examples of this type of arrangement being established by some major companies and these types of arrangements can be provided by a number of funders that also provide more traditional invoice finance and factoring facilities.

Alternative to Supply Chain Factoring & Reverse Factoring
However, a Supply Chain Finance or Reverse Factoring arrangement may not always be the right answer for a particular supplier as there can often be other issues that cause a supplier to seek a facility that is independent of their customer. An example might be not wishing their financing to be connected to their customer. The take up of a Supply Chain Finance arrangement may not be unanimous amongst the suppliers to a particular business and each situation needs to be reviewed on its own merits and compared with other options available independently within the market.

The Future
Although Supply Chain Finance appears to have taken off relatively slowly within the UK so far there are examples of new arrangements emerging and the product is likely to feature increasingly within the Invoice Finance market.

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