Definition

supply chain finance

Contributor(s): Diann Daniel

Supply chain finance is a set of technology-enabled business and financial processes that provides flexible payment options for a buyer (such as a manufacturer or retailer) and one of their suppliers (for example, a raw materials or inventory supplier), typically through the services of a financial institution at lower financing costs.

In a typical supply chain finance arrangement, a financial institution provides lower financing costs to a supplier, based on the credit rating of the buyer, which is typically better. Supply chain finance provides buyers with flexibility, such as options for early payment discounts or to lengthen payment cycles. Suppliers also have more flexibility and often opt to be paid early through the financial institution, minus a fee that is more modest in comparison to a traditional loan's. This frees up critical working capital to the supplier, fostering better financial health and helping it to weather ups and downs. Since the fate of buyers and suppliers can be interdependent, the success of the supplier helps buyers as well. In turn, the financial institution profits from an additional way to make money.

Supply chain finance is often enabled through a cloud-based platform shared among the buyer, supplier, and financial institution. Through this service, the bank can see both the buyer's and the supplier's supply chain information and milestones, such as the buyer's purchase order and the supplier's capital requirements to meet the PO, which the bank can then pay.

Supply chain finance can provide a lower cost of capital to keep supply chain costs in check, optimize working capital for both the buyer and supplier, and streamline the payment process. Because it provides benefits for all those involved and due to the complexity of modern supply chains (particularly global supply chains), supply chain finance is becoming increasingly popular.

This was last updated in January 2016

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