Supply Chain Finance and Reverse Factoring

All supply chain professionals should understand not only the physical flow of goods and services towards the end-customer, but also the financial flow of money from the customer back up the value chain.

Consider this scenario: How does a large firm, let alone a small business, increase its supply chain capacity to better serve its customers? CAPEX investments in new manufacturing plants, logistics fleet, or enterprise technologies are costly upgrades. If a firm does not have sufficient cash to pay for these upgrades due to outstanding account receivables, one trending financial recourse — exacerbated by the pandemic no doubt — is to increase assets through supply chain financing.

In simple terms, supply chain finance (SCF) refers to an agreement between buyer and seller to restructure the financing of purchases in order to generate working capital that benefits both parties. A financial institution, such as a bank or fintech partner, effects this model.

There are eight models of supply chain financing as listed in Table 1. In the next section, I deep dive the one of the most popular methods: reverse factoring, also referred to as payables finance.

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