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Supply chain finance is a short-term form of lending that addresses cash flow problems caused by long payment cycles and complex supply chains. It enables suppliers to free up working capital held in unpaid customer invoices and can extend the payment terms for buyers.
It is particularly helpful for businesses supplying larger customers as supply chain funding is based on the credit rating of the buyer. It is also highly beneficial for smaller-sized supplier businesses that suffer adverse credit issues simply because of slow payment.
Supply chain finance uses an online platform where all three parties – supplier, buyer, and financier - have access to upload, approve, and pay the invoices. The buyer pre-agrees their terms of payment with the funder and may be able to negotiate extended payment deadlines – crucially, without negatively impacting their supplier.
1. Buyer places an order with the supplier
2. Supplier fulfils the order and sends an invoice
3. Buyer approves the invoice and sends it to the financier
4. Financier pays the supplier straight away (minus their fee)
5. Buyer pays the financier on the payment due date (the buyer pays no fees)
UK Business Finance are commercial finance brokers and will help you find the right supply chain finance for your company.
Eases cash flow problems for suppliers
There may be a significant time gap between the payment deadline for a supplier’s bills and them receiving payment from customers. Supply chain finance reduces the likelihood of negative cash flow being such an issue.
Builds strong trading relationships
As supply chain finance is based on the buyer’s credit rating and is beneficial to both parties, it builds stronger relationships between trading partners. The buyer’s payment terms can be extended through negotiation with the financier directly, without compromising the financial stability of their supplier.
Reduces supply chain disruption
The supply chain functions efficiently when the supplier is paid quickly, and can then pay their own suppliers. Payment terms of up to 120 days are common in some industries, which can create significant financial difficulties for smaller businesses. The lending company accepts the long payment term rather than the supplier; the local economy also receives a boost when purchases and payments are less problematic.
Cost-effective form of funding
As supply chain finance is based on the buyer’s credit rating it can be less costly for suppliers than other funding types. It can be used with more than one buyer, transforming the cash flow situation for smaller businesses.
Can be used with other types of finance
Supply chain funding is unsecured and can be used alongside other forms of finance, such as lines of credit. It does not involve providing assets as security for the financier, making it a flexible option.
Reduced risk for the lender
Lenders’ terms and fees typically depend on the level of risk that they take on. A larger company’s credit rating will generally be high so the financier’s perceived level of risk is significantly reduced in comparison with a smaller supplier seeking funding independently.
With poor cash flow being a widespread problem for small supplier businesses, supply chain financing offers valuable benefits. The advantages for buyers in terms of protecting their working capital are also clear.
Get in touch with our experienced team of commercial finance brokers to find out more about supply chain financing and how it can help you. We can make applications on your behalf, with our services being free-of-charge.
We work across a wide range of sectors throughout the UK, providing specialist advice to each sector.
Can I use property as security for a business loan?
Secured business loans require one or more assets to be put forward as collateral. This protects the lender from financial loss if a company cannot afford to keep up with the repayments at any stage.
Does my company have a credit score and how can I improve it?
Limited companies do have credit scores and they’re used for a similar purpose as individual credit ratings. Lenders use them as a guide to creditworthiness, but a business credit score is also useful for suppliers and investors to gain insight into your company’s financial situation.
What is bad debt and how can I protect my company?
Bad debt presents an insidious threat to the financial stability of your business. It places strain on your working capital and creates uncertainty in paying your bills, but this can be addressed successfully if you take proactive steps to protect your company.
What is the difference between open and closed bridging loans?
Bridging loans are short-term forms of secured finance that literally ‘bridge’ a gap between funds going out of a business and monies coming in.