There is a new innovative financing option available to businesses and it is set to disrupt the multi-billion dollar factoring and asset based finance industry. Going by several names, supply chain financing, reverse factoring, trade finance, it has become a very popular service for some of the largest fortune 500 companies as well as a major source of revenue for major banks.
Although a new financing option, it is hardly a new concept. In simple terms, supply chain finance or trade finance, is a method that allows businesses to extend payable terms to match inventory turn or receivable receipts.
Supply chain finance was born out of the automobile industry, an industry which requires long lead times between vendor purchases and the final sale. Auto companies noticed that pushing suppliers for longer payment terms, up to 180 days, was putting stress on their supplier’s ability to operate efficiently. To solve the problem, major banks, started offering quick pay options through the buyer’s vendor portal allowing the banks to extend terms to the buyer. The bank made money by paying the vendor a discounted amount of the invoice and profited when they received 100% when the invoice was eventually paid by the buyer. The collaboration was so successful that the service has expanded to major retailers and other Fortune 500 companies in the US and around the world.
The complete transaction is through the buyer’s vendor portal which is accessed by the suppliers when they want to be paid early. These vendor portals, once only available to major corporations, are now available to mid-cap companies allowing smaller companies access to trade financing. This arrangement is a boom for both supplier and seller allowing them the ability to cut payable processing costs and improve cash flow without the need for additional borrowing.