How Does Supply Chain Finance Work?
Supply chain finance is here to stay. Those who are unfamiliar with it will ask, “How does supply chain finance work?” Although it is not complicated, supply chain finance or SCF does have a number of dynamic features that will benefit both buyers and suppliers.
Supply Chain Finance 101
Supply chain financing engineers one factor to reach specific goals: payments. Depending on the responsible party, these tactics have drastically different effects on those involved. The first tactic merely consists of extending payment terms to suppliers. By extending payment terms, which increases a buyer’s DPO, the buyer negotiates payments up to 60, 90, or even 120 days after receiving supplier invoices. In this scenario, the supplier has no choice but to wait longer for payment. FX-MM states that pay term extensions, while improving the working capital for the buyer, can be highly challenging for suppliers. The buyer is benefitting, but the supplier is more than likely not.
The second tactic is different, and it empowers both the buyer and the supplier. In this scenario, the buyer enables an option for suppliers to select early payment on invoices by utilizing a quick pay solution like APVelocity. By offering a quick pay option on the approved invoices, the buyer is not only succeeding in meeting working capital optimization objectives but is also inherently providing suppliers the opportunity to take greater control of their cash flow. A quick pay option eliminates negative impacts to suppliers of long pay terms, strengthening the relationship between the buyer and supplier.
Implementing an SCF Solution
Although suppliers and buyers can collaborate to implement an SCF solution like this, the buyer initiates the process. After procurement and treasury discuss goals and objectives, buyers identify a set of suppliers they feel would benefit from and would be open to supply chain financing. The buyer then invites suppliers to join the supply chain financing program, and the process begins.
After suppliers accept, the buyer starts the onboarding process. Onboarding is critical to the success of the program. Suppliers are integrated into the online invoicing platform (if not already incorporated) and their teams, usually the finance and accounting departments, are trained on the tools and processes involved in receiving supply chain financing.
Up to the point of payment, nothing about the supplier’s process should change: the supplier still submits the invoice to the buyer following standard protocol. With an SCF solution, when the buyer approves the invoice for payment on the platform, the supplier can select from the approved invoices which they would like to receive early payment. When selected, a third party funding organization such as APVelocity is notified and sends payment instantly. The supplier’s invoice is paid at a discounted amount. This payment is transferred electronically, increasing efficiency and eliminating miscommunication opportunities.
When the buyer is prepared to make payment on the invoice, the buyer sends remittance to the third party funding organization. This completes the supply chain financing for the invoice. The buyer meanwhile has maintained its goal of optimizing working capital, and the supplier, having selected the invoices it needs early payment on, has regained control of its cash flow and alleviated the potential for financial stress.
With supply chain financing, an otherwise bumpy road becomes smooth and navigable. Because of process automation, buyers and suppliers do not experience a decrease in efficiency. On the contrary, with the improved working capital, the supply chain can become stronger and far more efficient.
Implementing a supply-chain financing solution such as APVelocity involves more than merely enabling an option on an invoicing portal. Buying organizations must have a clear understanding of the implementation process. They must also be in complete agreement on adoption goals and supplier targets. We do know according to PWC, roughly 80 percent of companies that use supply chain financing plan to extend its use further. This confirms that a supply chain solution like APVelocity makes a profound impact on buyers and suppliers. Understanding the details of how an SCF solution works are vital to a program’s success.