For businesses looking to speed up the flow of cash from key customers, supply chain financing may be just the ticket.
Using your company’s supply chain to secure financing is becoming an increasingly popular option to manage cash flow, liquidity and growth. But how does supply chain financing actually work, and is it a good option for you?
How It Works
Consider this example: Company A purchases $10,000 in supplies from Company B, and receives an invoice with 90-day payment terms. But Company B needs to be paid sooner due to upcoming bills. Instead of trying to persuade Company A to pay ahead of schedule, it might instead consider working with a financial institution for financing.
If Company B were to contact Regions about this, it would have two potential options: supply chain finance (SCF) or receivables purchase facility (RPF).
With supply chain financing, Regions buys the invoice from Company B at a discount for the convenience. The payment due from Company A at the end of the 90-day term would go to Regions instead of Company B.
This arrangement benefits both parties: Company B gets paid earlier, and Company A gets the full 90 days. Both companies enjoy more liquidity.
The other option, receivables purchase facilities, would involve only Company B: Regions would buy the invoice at a discounted rate and Company B would repay Regions the full amount once they receive payment.
Should You Consider Supply Chain Financing?
With supply chain financing, the lending institution is, in a sense, issuing unsecured credit to cover the invoice based on Company A’s creditworthiness.
A major perk of supply chain financing is that it isn’t an actual loan and doesn’t show up as debt on an accounting ledger; it is simply listed as an account payable for Company A.
For suppliers hoping to get paid sooner— Company B—this type of financing helps free up cash flow on accounts receivable without antagonizing buyers.
Considering supply chain financing for your business? Before you get started, Daniel Wells with Regions Business Capital recommends talking to your customers.
“Ask your customers if they have a supply chain finance system in place, and consider getting involved if they do,” he says. This can be an important way to deepen the relationship without creating a new SCF arrangement.
If there’s no SCF system in place, some banks will help facilitate an arrangement that benefits all parties. For example, Regions works with both buyers and suppliers to create more efficient and liquid supply chains.
If you prefer not to approach your customers about a SCF facility, receivables purchase facilities may be an option. Keep in mind, however, that your creditworthiness and annual funding must meet certain requirements and minimums to qualify.
CONTACT Regions Business Capital to discuss financing options
