Supply Chain Finance

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Supply chain finance is a financing arrangement in which a buyer's bank or a finance provider pays the buyer's suppliers early, at a small discount, while the buyer pays the full invoice later on the normal or extended due date.

Supply chain finance, also called reverse factoring, uses the stronger credit of a large buyer to help its suppliers get paid sooner and more cheaply than they could arrange on their own.

For example, a large retailer agrees to pay its suppliers in 90 days. Under a supply chain finance programme, a supplier with an approved invoice of 100,000 can choose to receive about 99,000 from the finance provider after a few days. The retailer then pays the provider 100,000 on day 90.

Suppliers benefit from faster payment at a lower cost than other borrowing. Buyers can extend their payment terms, improving their own cash flow, while supporting their suppliers.

Supply chain finance has been criticised for obscuring how much companies effectively owe, since the amounts may appear as trade payables rather than debt. The collapse of Greensill Capital, a major provider, in 2021 drew attention to these risks. Accounting rules now require companies to disclose more information about supplier finance arrangements.

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