Can supply chain finance help your business?

Small and medium sized businesses often find themselves on the receiving end of late and missed payments, but are forced by their size and lack of bargaining power to meet the stipulations laid down by larger companies. This can be particularly difficult when SMEs find themselves wedged between two big businesses in the supply chain. On the one hand, they are being paid late by their client and on the other, are expected to pay their supplier on time. This causes incredible cash flow issues and can be damaging to SMEs and their future success.

What is supply chain finance?

Supply chain finance, often called supplier finance, is one solution to this issue. At a basic level, supply chain finance involves the supplier, in our case an SME, receiving payment on an approved invoice early, usually from an external institution, such as a bank. It also allows the payer to extend its payment terms, improving both organisations’ working capital positions. In many cases, once an invoice has been approved by a client, the supplier will be able to choose whether to withdraw the finance immediately or wait until the due date for payment by the client.

Legislation history

Supply chain finance used to be the domain of large businesses and multinationals and excluded SMEs from involvement. In recent years, this has changed for a number of reasons. First and foremost, the difficulties SMEs faced acquiring finance forced the government, banks and big business to re-evaluate the options available to small business. In 2012, the U.K. Government rolled out the Supply Chain Finance Initiative and attempted to give SMEs greater power in supply chains. This has contributed to large growth in the supply chain finance market over the last few years.

How could it help SMEs?

There are a number of advantages to using supply chain finance, particularly in the case of SMEs. First, the reliance on prompt payment for services rendered is reduced, giving SMEs greater breathing space and larger working capital and limiting the negative impact of late or missed payments. Due to the co-operative nature of the supply chain financing, risk in the supply chain is also greatly reduced. Additionally, it can help in situations where one of the parties holds a credit score that means it can’t receive finance as easily. By entering into a supply chain finance agreement with a larger, credit-secure business, they may be able to receive finance that would otherwise be denied.

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