Supply Chain Financing (#143)
/In this podcast episode, we discuss how supply chain financing works. Key points made are:
Supply chain financing provides suppliers with an early payment option at a relatively low interest cost. Buyers involve their bank in the payment process, where the bank offers suppliers early payment in exchange for a discounted payment.
It is less expensive for the supplier than obtaining separate working capital financing.
Supply chain financing primarily applies to open account transactions.
The buyer sets up supply chain financing in order to give its suppliers an improved working capital position. Doing so also reduces the risk in the buyer’s supply chain that is caused by poor liquidity.
Some software platforms are available for supply chain financing, where suppliers can pick which invoices will be paid early, and how many days early. These platforms use several banks, so that funding does not dry up. Using multiple banks also allows for some regional specialization by the banks.