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Supply Chain Finance Explained: How Supply Chains Make Money

There are many aspects of supply chain management that can be difficult to understand, but financial considerations are among the most important. Supply chain finance is a subset of finance that deals specifically with money in supply chains and how it moves around from one part to another.

This article will explain what supply chain finance is and why it's so important for your business.

What is supply chain finance

Supply chain finance is a new type of financing that enables companies to buy inventory from suppliers quickly and without cash. It also allows suppliers to sell their products with confidence knowing they will get paid on time or soon after, rather than having all the risk.

Supply chain finance helps companies minimize cash outlay while still accessing inventory quicker than traditional methods by allowing suppliers to provide trade credit at point of sale instead of an extended line of credit for future orders. With supply chain finance, there is no need for long-term contracts with your supplier just in case you need more products right away. Instead, you can place orders extremely quickly before the stock runs out - much like how Amazon operates!

How does it work

In supply chain finance, the bank advances a portion of the initial order to a manufacturer and then shares profits using percentages predetermined by the parties. These transactions usually take place without physical collateral. The bank's repayment terms are aligned with those of the company's customers. As an example, if Company A loans $200 in raw materials to Company B, and they agree on 60% for lender and 40% for borrower, when Company B sells their product that initially cost $100 per unit profit will be tallied against each party as follows: 60% or $60 from sale goes back to lender ($120) and 40% or $40 from sale goes back to borrower ($80). In this scenario both parties were able to generate revenue.

Benefits of Supply Chain Finance

The key benefit of supply chain finance is that it allows business to move more cash downstream in the cash system, so that their customers can have high levels of liquidity and access to funds. This stimulates the economy and creates employment opportunity. This process increases the productivity of capital and resources by implementing higher efficiency over time; making goods available when needed; improving systems for managing inventories; ensuring a positive return on investment on raw materials, finished goods or intermediate products.

Drawbacks of Supply Chain Finance

One possible drawback of supply chain finance is that it can result in a large increase in the amount of inventory on hand, which increases the costs proportionate to how long the balance sits. The increased payback periods may cause setbacks for your business, especially in cases where cash flows are tight.

Because suppliers often require separate finance to cover goods, supply chain finance is burdened with the added administrative costs as well.

Supply chain finance vs. factoring

Supply chain finance is a form of trade financing because it involves financing the supply chain process. Factoring, on the other hand, is a form of "working capital" financing. With factoring or debt collection, for example, it does not matter what goods are sold; rather, funds are advanced based on collateral such as accounts receivables and inventory. Supply chain finance focuses on managing all credit exposure from the point of a customer order through to receipt by the supplier and onward into manufacturing (if applicable).
Who should consider supply chain financing?

Supply chain financing can be a valuable option for those companies that have delayed payments to their suppliers or when prospective customers are not paying early.

In these cases, purchasing goods on credit as they are needed and then financing it by selling them on credit is a perfect solution. This way, you do not have to worry about whether the customer will pay you. If the customer does not pay in time, you just ship the purchased goods to another potential customer who has agreed to buy them right away. In this way, waiting periods before receiving payment from customers can be eliminated without having to take out loans. Supply chain financing is also great for emergencies when there may be gaps due to issues with raw materials being delivered on time or continuing production complications.
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