Let’s start with a key question, what is supply chain finance?
Supply chain finance (SCF) is when supplier invoices get financed by a bank on the basis of the creditworthiness of the buyer. A supply chain finance program is when a large buyer’s CFO approaches its bank asking to set up a (also known as reverse factoring) program for a number of suppliers.
While suppliers can be based domestically, more often than not, historically such SCF programs were designed to support international cross border operations with cash strapped suppliers based in a different country from financing bank and buyer. This can pose problems.
Country jurisdiction and inability to conduct timely KYC may be a challenge.
Inability to validate supplier (company) basic profile, authenticate ownership, physical location may rule out any funding in applicable country.
Domestic focused SCF programs (bank and supplier in same country) while relatively easier, were not appealing on the face of it for banks until recently.
Part of the reason, buyers (CFO’s) want such programs is so they can delay payments and improve their balance sheets. This case is ever much stronger for domestic leaning SCF programs due to boardroom demands. This is especially true when CFOs and their procurement teams are managing thousands of suppliers who may be involved in critical infrastructure and have a high recurring spend.
Some may argue that such programs are unnecessary for suppliers due to the wide availability of factoring (the act of suppliers selling their invoices to a third party at a discount)
The core difference is that supply chain finance programs are much more beneficial to everyone than factoring for the following reasons:
SCF embodies trust – all three parties in the ecosystem are working towards a mutual goal – buyer, supplier and bank
Financing and credit lines is based on creditworthiness of the buyer who likely will have stronger credit
Supply chain finance programs strengthen the trust and communication between buyer and supplier