About Supply Chain Finance About Supply Chain Finance
One of the most exciting and promising new products emerge in the banking industry over the last five years is Supply Chain Finance (SCF) which in its narrow definition is synonymous for Reverse Factoring. In essence it provides non recourse financing to the Key Suppliers of large Corporate Buyers.
The innovation that SCF brings to the table is its intelligent use of IT technology, hooking up all of the traditional trade partners on a single technology platform where Buyers and Key Suppliers share information on the status of trade receivables which in turn triggers finance moments. It is the transparency created by SCF which makes it possible for the Bank to provide higher levels of financing, process payments automatically and provide funding much faster to the Supplier than when compared to the traditional instruments like L/Cs or factoring schemes.
SCF creates a true win-win for all the parties involved and can therefore be considered the biggest financial innovation since the invention of the L/C. SCF may be one of the most attractive tools for companies to diversify funding sources, enrich and solidify their relationships with Suppliers and their core Banks.
At ING we define SCF as follows:
“Supply Chain Finance takes care of outgoing payments to Suppliers with the possibility to advance those payments based on the Buyer’s credit rating. This enables the Buyer to keep long terms or even stretch days payable, while the Suppliers’ position is not weakened.”
A Technology Platform connects Buyer, Suppliers and Investors (Banks) to facilitate invoice and credit note reconciliation, invoice trading and settlements between the parties.” SCF is also known in the market as Reverse Factoring as it is receivables driven financing with the initiative taken by the debtor. SCF puts a lot of emphasis on automation of business processes as it is closely related to reconciliation processes, e-invoicing and payment factoring. Reverse Factoring which can be totally manual or paper-based, is not interrelated with other key business processes.
The key difference of SCF with Traditional Factoring is that the Bank’s risk exposure is fully concentrated on one Buyer. Instead of one Supplier and many Buyers (in case of Traditional Factoring). The similarity of all factoring products is that the Bank (the Factor) is taking over receivables from the Supplier, finds some way to mitigate its risks and wants to cash in the outstanding payments to be done by Buyers.