The Role and 5 Working Mechanisms of Supply Chain Finance

Perhaps the term "Supply Chain Finance" is still unfamiliar to some who are not within the business sphere. When managing a business, it's crucial to realize that competition is a natural part of the business world and it's something to be expected.

Before delving into the business world or while running a business, one must truly understand SCF, or Supply Chain Finance. This article will comprehensively discuss what SCF is, as it's a crucial step that must be taken in the business world.

Getting to Know Supply Chain Finance

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Supply Chain Finance (SCF) is a form of working capital financing for businesses to facilitate easier business expansion by purchasing inventory from suppliers. Through this method, funding costs can be minimized as various parties are interconnected in a single transaction through technology. SCF generally involves three key stakeholders in its financing: suppliers, buyers, and financial institutions providing SCF services.

Surprisingly, SCF can significantly enhance your business efficiency compared to before. Typically, borrowers can receive payments faster and more conveniently for work done without providing comprehensive guarantees. On the other hand, SCF can also be an attractive alternative for your business as it allows you to conduct transactions without the need for traditional bank payments.

Understanding How Supply Chain Finance Works

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Supply chain finance is essentially a partnership between various parties employing short-term credit provision, aimed at assisting working capital for both buyers and sellers. This solution not only optimizes working capital and cash flow but also has a significant impact on business liquidity.

At the same time, by utilizing SCF, suppliers can sell their invoices to banks or other financial service providers. As a result, suppliers can access funds quickly and easily, ensuring business continuity and maintaining cash flow balance. The business activities can then proceed smoothly. According to simplidots.com, there are five working mechanisms of supply chain finance, explained below:

1. Invoice Submission

The process begins when the supplier delivers goods or services to the buyer. Subsequently, the supplier submits an invoice to the buyer according to the pre-agreed terms.

2. Invoice Validation

The buyer verifies the invoice submitted by the supplier. If everything is in order, the process proceeds to the next step.

3. Offer from Lender

The buyer receives an offer from the lender, which provides financing based on the invoices submitted by the supplier. This offer includes fees and payment terms.

4. Financing

After the buyer accepts the offer from the lender, funds from the lender are disbursed to the supplier. The supplier receives payment faster than the agreed payment deadline.

5. Payment from Buyer to Lender

At the payment due date, the buyer pays the invoice amount to the lender as per the agreed terms.

Benefits of Using Supply Chain Finance in the Business World

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As mentioned earlier, supply chain finance provides mutually beneficial options for both sellers and buyers. Moreover, during global financial crises, the SCF structure can help many companies survive. From the supplier's perspective, there are several benefits gained by implementing supply chain finance, including accelerated liquidity and the maintenance of stability and smooth cash flow for the company.

Meanwhile, from the buyer or consumer side, SCF provides benefits such as quick and relatively easy purchasing processes, securing working capital, and increasing the sales volume of ready-made goods.

These are some explanations about supply chain finance. With supply chain finance, companies have access to innovative financial solutions that greatly assist in optimizing cash flow and accelerating payments. In the era of technology, the use of supply chain finance is not just a smart strategy, but also a necessary step for sustainable business.