What is supply chain finance?

Supply chain finance covers a range of funding solutions that helps businesses turn unpaid invoices into available cash. It’s often used by suppliers who want to get paid sooner, and by buyers who want to hold onto their cash a little longer without straining supplier relationships.

Also known as reverse factoring, supply chain finance is typically set up by the buyer. Once a supplier sends an invoice and it’s approved, a finance provider steps in to pay the supplier early, usually within a few days. The buyer then pays the finance provider on the original due date.

Unlike traditional invoice finance, this approach is based on the buyer’s credit rating, not the supplier’s. That means the supplier often gets better rates and faster access to working capital. And for the buyer, it’s a way to keep suppliers happy while improving their own cash flow.

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What are the benefits of supply chain finance?

Supply chain finance offers value to both buyers and suppliers. Used properly, it's a collaborative tool that supports cash flow, strengthens relationships and helps businesses keep their finances healthy even when trading conditions are unpredictable.

Supply chain finance benefits for buyers

Buyers use supply chain finance to hold onto their cash for longer without delaying supplier payments. It improves their available working capital and helps keep supply chains strong and reliable.

• Extended payment terms: Buyers can negotiate longer terms without delaying payment to their suppliers, freeing up working capital for other priorities.
• More resilient supply chains: Early payments can prevent disruptions by supporting suppliers’ finances, especially during seasonal peaks or downturns.
• Stronger supplier relationships: Offering access to early payment helps build trust and loyalty, giving buyers more leverage when negotiating prices or service levels.

Supply chain finance benefits for suppliers

Supply chain finance gives suppliers faster access to cash, often at a lower cost than traditional borrowing, because it's based on the buyer’s credit strength, not theirs.

• Faster payments: Suppliers can unlock invoice value soon after it’s approved, often within days, without waiting 30, 60 or even 90 days to be paid.
• Lower cost funding: Since the finance is based on the buyer’s credit history and credit score, the cost is usually lower than other short-term loans.
• Improved forecasting: Knowing exactly when cash will land makes it easier to manage working capital and plan for growth.

How does supply chain finance work?

Supply chain finance leverages the creditworthiness of the buyer, which is usually better than that of the supplier, enabling suppliers to access funds at a lower cost than they could on their own. 

Here’s how it works:

1. Supplier delivers goods/services: The supplier ships the goods or provides the services to the buyer and issues an invoice.
2. Invoice approval: The buyer approves the invoice and commits to paying it at a future date, typically in 30 to 90 days.
3. Finance request: The supplier requests early payment on the invoice from a third-party finance provider, such as through an invoice finance provider, or a short term loan through iwoca .
4. Early payment: The finance provider pays the supplier a percentage of the invoice value upfront (usually 90-100%), minus a small fee, or the buyer uses the loan to pay their invoice.
5. Buyer payment: If using invoice finance, the buyer pays the full invoice amount to the finance provider on the agreed-upon due date, usually once the inventory has been sold, or repays their loan.

This arrangement benefits both parties: suppliers get faster access to cash to manage their working capital needs, and buyers can negotiate better terms or simply manage their cash flow more effectively.

Supply chain finance example

To illustrate, let’s consider a practical example:

Imagine a supplier sells £50,000 worth of goods to a large retail chain. Under standard terms, they’d have to wait 60 days to be paid. That’s a long time to go without cash, especially if they need to restock or pay staff in the meantime.

With supply chain finance, once the buyer approves the invoice, the supplier can request early payment through the scheme. A finance provider pays the supplier most of the invoice upfront, minus a small fee. On the original due date, the buyer pays the finance provider the full amount.

The supplier gets the cash they need to keep trading. The buyer holds onto funds longer without harming the supplier relationship. And the finance provider earns a fee for facilitating the process.

This type of win-win model is particularly useful when buyers have stronger credit ratings than their suppliers, which is common in many supply chains.

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What types of supply chain finance are there?

Supply chain finance encompasses several key components that ease its effective implementation. These components include:

Invoice financing

Invoice financing is when a financial institution pays suppliers early based on the buyer's creditworthiness. The value is that It enables suppliers to receive payment for their invoices before the agreed-upon payment terms. Suppliers get money right away. 

They can use it for expenses, growth, or cutting costs. Financial institutions offer financing options to help suppliers keep their cash flow healthy and the supply chain running smoothly.

Dynamic discounting 

Dynamic discounting is a flexible payment arrangement that benefits both buyers and suppliers. Suppliers offer early payment discounts to buyers, helping them manage their money better and increase cash flow. 

On the other hand, suppliers can receive early payment, ensuring a steady stream of cash and reducing their reliance on external financing. This collaborative approach fosters strong relationships between buyers and suppliers, leading to increased trust and efficiency within the supply chain.

Approved Payables Finance

In this arrangement, financial institutions provide funding directly to suppliers based on the approved invoices from the buyer.

Approved payables finance is a financing option that allows suppliers to get funding directly from financial institutions based on the invoices approved by the buyer. 

This arrangement provides suppliers with quick access to working capital, eliminating the need to wait for payment from the buyer. By leveraging the creditworthiness of the buyer, suppliers can secure financing at favourable rates, enabling them to meet their financial obligations and invest in their business growth.

Inventory Financing

Inventory financing is a form of asset-based lending that allows suppliers to use their inventory as collateral to secure financing. 

By pledging their inventory, suppliers can access working capital to cover operational expenses, invest in new products, or expand their production capabilities. This type of financing is particularly beneficial for suppliers with high inventory turnover, as it provides them with the necessary liquidity to manage their cash flow effectively.

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How does supply chain finance compare with other financing options?

Supply chain finance is distinct among business funding tools. It’s not a loan in the traditional sense, and it doesn’t require suppliers to give up control of their invoices. Instead, it allows suppliers to access early payment, based on their buyer’s creditworthiness.

Here’s how it stacks up against other common funding methods:

Small business loans‍

A small business loan provides a lump sum upfront, which can be used for any purpose. You repay it over time with interest. While flexible, loans rely on your own credit profile and often involve application processes, affordability checks and sometimes security.

Trade finance‍

Trade finance is used to fund the purchase of goods from overseas or domestic suppliers, often covering costs from order to delivery. Unlike supply chain finance, trade finance focuses on funding the purchase, not accelerating the payment for already delivered goods or services.

Equipment finance‍

Equipment finance helps businesses buy or lease machinery, vehicles or technology. The equipment often acts as security. It’s ideal for asset-heavy businesses but doesn't improve invoice payment timelines or supplier cash flow.

Invoice finance‍

Invoice finance is often confused with supply chain finance, since they both involve invoices, but there are key differences. With invoice finance, the supplier initiates the funding by selling unpaid invoices to a lender. In contrast, supply chain finance is buyer-led, giving suppliers access to lower-cost funding based on the buyer’s credit.

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What is the difference between trade finance and supply chain finance?

Trade finance helps buyers fund the purchase of goods, while supply chain finance helps suppliers get paid earlier once an invoice is issued and approved. They serve different points in the transaction cycle.

Trade finance is often used for importing or manufacturing, providing funding at the start of the supply process. It can involve tools like letters of credit or purchase order finance. Supply chain finance, in contrast, kicks in after the goods or services have been delivered. A third-party finance provider pays the supplier early, and the buyer repays later.

How do you implement supply chain financing?

To implement supply chain finance, a business first needs to partner with a finance provider that offers this service, which could be  directly or through a third-party platform. From there, the process is designed to be quick and easy for both buyers and suppliers.

Here’s how implementation typically works:

1. Set up the programme: The buyer agrees terms with a supply chain finance provider. This could be a bank or a specialist fintech platform. They’ll agree on payment terms, systems integration and supplier onboarding.
2. Onboard suppliers: The buyer invites suppliers to join the scheme. This is usually optional, but many suppliers sign up if it means quicker payments.
3. Integrate with payment systems: Invoices are approved and uploaded to the platform. Some providers offer plug-ins for accounting software or ERP systems to streamline this.
4. Apply forearly payments: Once an invoice is approved, the supplier can request early payment. The finance provider pays them, deducting a small fee. The buyer pays the full invoice value later, on the original due date.

Strong supplier communication and clear onboarding processes are essential for a successful rollout. It also helps if your chosen provider understands your sector and can support multi-supplier arrangements.

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Finance your supply chain with a short term loan

If you need fast, flexible financing for your supply chain, our Flexi- Loan offers flexible repayment terms and fast access to funds, borrowing from £1,000 to £1,000,000.

Here are a few reasons to choose our business expansion loans:

• Apply within minutes online and get approved within 24 hours.
• Borrow money for as little as a day and up to two years.
• No early repayment fees or collateral required.

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