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Supply Chain Finance – How to Supercharge Your Business!
How to get the most out of a business finance facility.
Mitigate risk of delinquency and exchange rate fluctuations
Generate cash flow through early financing
Strengthens relationships with buyers
Shorten accounts receivables recovery time
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Bringing together aviation and regulated finance providers:
What is Supply Chain Finance?
It is an arrangement made between suppliers, buyers and lenders whereby a cash advance is made to the supplier in a supply chain.
This type of supplier finance ensures a positive cash flow for the supplier which allows them to optimize their cash within the supply chain.
Positive cash flow in this context simply means that the supplier has more money coming in than going out, which in turn means that they have enough cash available to allow for smooth business operations.
This type of arrangement is also beneficial for the buyer in the chain as it enables them to negotiate an extended period before they have to pay for the goods that they’ve been supplied.
How Does Supply Chain Finance Work?
This type of transaction is a fairly straightforward process that is mutually beneficial for all parties in the chain:
One
The supplier provides the buyer with the goods (or services) they require and issues them with an invoice.
Two
The buyer approves and confirms the invoice and agrees to pay it (usually within a 30-90 day period).
Three
The supplier requests payment of the invoice value from a third party financial institution (lender).
Four
After checking the creditworthiness of the buyer, the lender advances a percentage of the invoice amount (usually between 90% and 100%) to the supplier, minus a small fee.
Five
On the payment due date, the buyer makes the payment to the lender.
The lender will usually consider this type of finance to be a safe bet because the buyer in these situations will typically be a large company (larger than the supplier) with reliable creditworthiness.
Although the supplier will pay a small fee, the buyer incurs no fees in this arrangement.
Who benefits
So… who is supply chain finance for?
01/
Parts manufacturers
02/
Aviation Parts Repair Directories
03/
Aviation Tooling Repair & Hire Platforms
04/
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What Are the Pros and Cons of Supply Chain Finance?
There are several benefits of this type of financial arrangement (as well as some disadvantages). Let’s look at the pros and cons:
Pros
The supplier gets paid faster
Many businesses report that a major problem facing them is poor liquidity. Supply chain finance alleviates this issue by ensuring that the supplier is paid a lot sooner than the typical 30-90 days. This means better cash flow and allows the supplier to use their working capital to manage their business, purchase raw materials and continue creating and supplying goods to their customers.
The supplier has smaller borrowing costs
Because the strength of the buyer’s credit anchors this type of arrangement, the supplier’s financial costs are lower than with traditional borrowing. As noted above, typically the buyer will be a larger company than the supplier, with a stronger credit base. As such, financial institutions will be happy to advance funds to the supplier based on the value of the invoice.
Buyers can negotiate an extended grace period
As the buyer is essentially the driver of the transaction, they may be able to delay payment beyond the usual 30-90 days, even up to and beyond 120 days. This creates a cashflow positive situation for the buyer, freeing up their working capital until the payment is due.
Strong buyer/supplier relationships
A supply chain finance transaction is a collaborative and mutually beneficial financial arrangement that can help cultivate a robust and reliable supply chain.
Cons
There may be some disadvantages to watch out for, such as:
Buyers with a poor credit score
If the buyer has a weak financial base, then supply chain finance may not be an option. The lender will always look for strong creditworthiness in the buyer in order to reduce the risk to the lender.
Longer grace periods can be disadvantageous
If the buyer leverages their strong position to negotiate a lengthy period before repayment, this may impact the supplier negatively. Generally, the longer the lender has to wait to be repaid, the higher the fee may be for the supplier.
Frequently Asked Questions about Freight Forwarders Insurance
Is Supplier Finance the Same Thing As Supply Chain Finance?
Yes, supplier finance is the same as supply chain finance and is commonly abbreviated to SCF for short. It is also sometimes known as reverse factoring.
Hangar Keepers is a claim for damage against physical property such as aircrafts, parts or equipment.
How much does supply chain finance cost?
The costs will vary based on certain considerations, such as the amount of funds being advanced, the credit worthiness of the buyer, the repayment period, and other factors. Generally the supplier will incur a fee of 10-20% of the invoice total.
How is supply chain finance different from invoice factoring?
With factoring, the supplier sells their accounts receivable to a financial lender. This gives the factor control over collections. With SCF (or reverse factoring) the buyer typically initiates the arrangement so that the supplier receives the funds for the invoice immediately and the buyer can agree a longer repayment period with the lender. The lender takes a fee from the supplier.
Who does supply chain finance benefit?
This type of arrangement is beneficial to all the parties in the supply chain; the supplier receives their payment more quickly and thus maintains cash liquidity and the buyer is able to arrange a longer grace period. The lender receives a fee for making the loan.
Example case study
What Is an Example of Supply Chain Finance?
Example: A+ Engineering is a supplier that provides parts to BestFlight Airlines, a major airline company. BestFlight buys $2M worth of parts from A+ Engineering and standard terms are payment to be made within 60 days of delivery. However, A+ Engineering has to pay for various raw materials within 30 days, meaning they would be in a negative cashflow situation.
Using the option of supply chain finance, a financial provider would make an immediate cash advance to A+ Engineering (minus a small fee) and BestFlight Airlines agrees to repay the lender in 90 days.
Everyone in the chain wins; A+ Engineering gets paid straight away and has the cash to make their payment for raw materials and BestFlight Airlines gets an extended window to make their payment for the parts that were supplied by A+ Engineering. It’s a win-win for everyone involved.
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Are There Other Types of Supply Chain Finance?
Yes, although the term supply chain finance specifically refers to an arrangement to make best use of funds within a supply chain, the terms used between organizations can differ and sometimes can refer to a broad variety of financial arrangements that can be set up between suppliers, buyers and lenders.
The primary purpose of this type of finance is to improve liquidity within the supply chain and there is a range of ways that this can be done.
A trade finance facility is a general umbrella term for the broad range of financial products available to facilitate international trade.
Let’s take a look at some of the different options:
Supply Chain Finance from the Aviation Experts
Rate-saving logistics finance from the aviation experts.
Pre shipment finance
This includes funds that a supplier or exporter can access prior to supplying the goods to the buyer. The exporter can make use of the funds to cover costs for things such as raw materials, warehousing, labor, packaging and processing the shipment, transport costs, customs, duties and pre-shipment inspection costs and other associated expenses involved in exporting goods.
Post shipment finance
Usually a supplier will have to wait between 60-90 days after supplying the goods before receiving payment. With post-shipment finance, a lender can get a payment to the supplier much faster, usually when the shipment has been sent to the buyer.
Post-shipment finance is usually a short term loan based on evidence of confirmation of the shipment. The main purpose of post shipment finance is to help the exporter to maintain liquidity until they receive payment from their buyer.
Invoice financing
A lender advances funds to a business for their invoices and the business repays the lender themselves with a repayment schedule and the fee spread out across the repayments. This is also known as invoice discounting, or accounts receivable financing.
Invoice factoring
A factoring company is a business that acts as a financial intermediary. They purchase your outstanding invoices and advance you an amount (usually 80-90%) of the funds. They then chase the customer for the outstanding money owed and when they have received it in full, they pay you the remaining 10-20% (minus a fee).
Trade finance and receivables financing
This is where the exported goods are the collateral or security for the loan. The lender will provide a percentage of the value of the good, usually 75-85% although this may be lower depending on the nature of the goods, i.e. if they are perishable, or perhaps they are low demand products that may be difficult to resell.
Trade finance generally focuses on facilitating international trade by lending funds to help with transactions or by providing a letter of credit to guarantee payment for the goods.
Trade finance helps to reduce the risks involved in international trade and is typically an arrangement between an importer, an exporter and a lender.
Receivables Financing vs Factoring
What are the advantages and disadvantages of receivables financing (or accounts receivable financing) and factoring (or invoice factoring)?
Although similar, there are differences between these types of financial funding.
Invoice factoring is technically asset purchase rather than lending, so this doesn’t affect a business’s debt-to-equity ratio and is considered low risk financing. It can be more expensive though and also affect client relationships as some clients may not like a third party being involved in collections.The main advantage of invoice factoring is quick access to cash for the supplier.
The main differences between receivables financing and factoring are:
- Different fee structures
- A higher percentage of the invoice provided with invoice factoring
- Invoice financing doesn’t include collections although invoice factoring often will
- Invoice factoring is usually a quicker way for the supplier to access the invoice value than financing
Export invoice financing
Sometimes known as export factoring, this option allows an exporter to access cash from an invoice that’s not yet paid by an overseas customer. This type of financing is faster and more flexible than a traditional bank loan. You generally only pay for the funds you use and the amount can be renegotiated more easily.
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Summary
Supply chain finance solutions include a wide range of financial arrangements to help businesses to optimize liquidity within a supply chain and make best use of working capital.
When considering which method is best for you, it’s wise to take into account such factors as:
- How quickly do you need the funds?
- How will the arrangement you choose affect your business relationships?
- How will your choice impact your cash flow?
As you can see from the information above, supply chain finance can be a powerful tool to help your business within a supply chain, however, because of the range of options available it is advisable that you discuss your particular financial needs with an expert.
Contact us and discover how we can help you with your supply chain finance questions.
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