Definition of Supply Chain Finance
Supply chain finance is a business and financing process that involves various parties in a transaction i.e. the seller, buyer and financing institution. The purpose of supply chain finance is to lower financing costs and improved business efficiency.
Explanation of Supply Chain Finance
Under supply chain financing process, a company sends its approved payable invoices to its financing institution (let’s say a bank in this case), specifying the dates on which invoice payments are to be made. The bank makes these payments on behalf of the company. However, in addition to this basic payables function, the bank also contacts the company’s suppliers with an offer of early payment, in exchange for a financing charge for the period until maturity. If a supplier agrees with this arrangement and signs a receivables sale contract, then the bank delivers payment from its own funds to the supplier, less its fee. Once the company’s payment dates are reached, the bank removes the funds from the company’s account, transferring some of the cash to those suppliers electing to be paid on the pre-arrangement settlement date, and transferring the remaining funds to its own account to pay for those invoices that it paid early to suppliers at a discount.