Supply chain finance
In supply chain finance, also called reverse factoring, a bank or other funder pays a buyer's suppliers early against invoices the buyer has approved, and the buyer repays the funder at the invoice's original due date. Because the funder's risk sits on the buyer's credit, suppliers get cash at rates closer to the buyer's cost of capital than to their own borrowing cost.
Examples
Rate arbitrage: A machining supplier borrows at 11 percent on its own line. Through its OEM customer's program it sells a $500,000 approved invoice 75 days before maturity for a charge of $6,250 (6 percent annualized), versus the $11,458 the same cash would cost on its line.
Term extension: An equipment maker moves 300 suppliers from net 45 to net 90 alongside an SCF program. On $730 million of annual purchases, the extra 45 days holds about $90 million of cash, while enrolled suppliers still collect within roughly 10 days of invoice approval.
Stress test: In a credit crunch the funder halves the program limit. Suppliers that built day-10 cash into payroll planning suddenly wait the full 90 days, and within a month three of them put the buyer on credit hold.
Definition
The program runs on approved invoices. Once the buyer confirms an invoice is valid and payable, the supplier can sell that receivable to the funder for immediate cash minus a financing charge, and the buyer pays the funder the face amount at maturity. The charge is priced off the buyer's credit, which is the whole point: a small stamping house effectively borrows at something near an investment-grade OEM's rate. It is post-delivery financing of receivables, a different instrument from a letter of credit, which guarantees payment before trust exists.
Buyers usually pair a program with longer payment terms, moving from net 45 to net 90 while giving suppliers a path to cash within days. Done openly, both sides gain working capital. The contrast with dynamic discounting is the funding source: dynamic discounting spends the buyer's own cash for a discount, while supply chain finance leaves the buyer's cash untouched until maturity.
Two cautions. Accounting standards now require buyers to disclose material programs, and analysts read aggressive term extension financed this way as debt in disguise. Program funding can also be cut in a downturn, exactly when suppliers lean on it hardest, so treat SCF as a convenience for the supply base rather than load-bearing structure.
Related Terms
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