Supply Chain Finance
Supply chain finance (“SCF”), also known as reverse factoring, is a financial tool that optimizes cash flow by allowing businesses to stretch their payment terms to their suppliers while providing the option for their suppliers to get paid early. This process links all the parties in a transaction – the buyer, seller and Summar – to potentially lower financing costs and improves business efficiency.
Supply chain finance (SCF) provides short-term credit up to 90 days that optimizes working capital for both the buyer and the seller. It may optionally involve the use of our technology platform to automate transactions and track the invoice approval and settlement process from initiation to completion. The growing popularity of SCF has been largely driven by the increasing globalization and complexity of the supply chain in cross-border transactions in different industries.
There are a number of SCF transactions, including:
Extension of buyer’s Accounts Payable terms
How it works for your company
Summar must pay your vendor within 60 days of BOL date.
Max Payment Terms: Up to 90 days (reflected on your vendor’s P.O.)
Example of a transaction
A typical extended payables transaction works as follows. Let’s say Company X buys goods from a supplier Z. Z supplies the goods and submits an invoice to X, which X approves for payment on standard credit terms of 45 days. If supplier Z requires payment before the 45-day credit period, the supplier may request immediate payment (at a discount) for the approved invoice from Company X’s financial partner (Summar in this case). Summar will remit the invoiced amount (less a discount for early payment) to supplier Z. Given the relationship between Company X and Summar, the latter may extend the payment period for a further 30 days.
In most situations, Buyer will attempt to delay payment as long as possible, while seller seeks to be paid as soon as possible. SCF works especially well when the buyer has a better credit rating than the seller and can, therefore, access capital at a lower cost. The buyer can leverage this advantage to negotiate better terms from the seller such as an extension of payment terms, which enables the buyer to conserve cash or use it for other purposes. The seller benefits by accessing capital, while having the option to sell its invoices to receive immediate payment. Company X, therefore has obtained credit terms for 75 days, rather than the 45 days provided by supplier Z, while Z has received payment faster.
Step by step process
Differences with invoice factoring:
Non-intrusive solution that does not require for your customers to be notified of the relationship
Encourages collaboration between the buyer and seller, rather than the competition that often pits buyer against the seller and vice versa.
Compliments your traditional bank financing line for additional working capital
What you should know about supply chain finance:
It is not a loan – Supply chain finance or reverse factoring is an extension of the buyer’s accounts payable and is not considered financial debt. For the supplier, it represents a true sale of their receivables.
It is not factoring – With our solution, 100 percent of each invoice minus a small transaction fee is paid to the supplier, and there is no recourse burden on the supplier once the invoice is paid.
Supply chain finance is not just for large companies – It provides value for firms of all sizes and credit ratings. In fact, we specialize in middle market companies with revenues between 10 to 200 million.