Introduction to Supply Chain Finance

Supply Chain Finance (SCF), also known as supplier finance or reverse factoring, is a financing solution where suppliers can receive early payment on their invoices by reducing the risk of supply chain disruption and enabling both the buyers and suppliers to optimise their working capital.

Transact facilitates supplier-led financing, wherein the supplier provides goods or services to the buyer and subsequently submits the relevant invoice to the financial institution for processing. Upon approval of the invoice, the supplier needs to request early payment from a financing provider, typically a bank or financial institution.

The parties involved in SCF are:

• Buyers
• Suppliers
• Financial Institutions

Supplier-led Supply Chain Programme

Following are the attributes that are typically associated with supplier-led finance.

• Initiator: The financing arrangement is initiated by the suppliers.
• Process: The supplier typically factors their invoices to a financial institution to receive early payment at a discount. (Typically, discounted interest is collected in advance, calculated based on the number of days from the finance date to the invoice maturity date, along with any additional upfront fees that may be charged by the financial institution).
• Onus of Re-Payment: The onus of re-payment is on the buyer if the agreement is without recourse and it is on the supplier if the agreement is with recourse.

Following are the techniques for supplier-led supply chain programme:

Receivables Discounting: This method allows funding based on receivables, such as invoices. Usually, financing is provided at a rate between 75-100% of the receivables’ value, which is then repaid in full to the finance provider by the debtor. Any remaining portion of the receivables that were not financed is returned.

Factoring: Sellers of goods and services sell their receivables represented by outstanding invoices, at a discount to a finance provider (commonly used as a factor). The finance provider advances the funds, manages the debtor portfolio (including collection of the underlying receivables), and provides protection against the obligors’ insolvency.

SCF Life Cycle

This section explains the functions involved in Supply Chain Finance.

The below diagram illustrates the invoice life cycle.

The below diagram illustrates the agreement and loan life cycle.

Following are the steps involved in the SCF life-cycle:

• Supply Chain Finance Programme is a Financial arrangement between the Borrower and the Financial Institution, where suppliers can receive early payment on their invoices at a discounted rate, facilitated by a financial institution.
• Facility Agreement is where the agreements between the buyer, supplier, and finance provider is set up and it is a crucial step in structuring a Supply Chain Finance (SCF) transaction. These agreements delineate the roles, responsibilities, and conditions for all parties involved. This process includes defining retention margin of the invoice face value, defining grace days for repayment, and defining counterparty limits and any agreement level fees.
• Invoice Management in Supply Chain Finance encompasses the collection of invoice details for financing the invoices. This includes critical information such as the Invoice amount, Issue date, and payment due date. Additionally, it involves monitoring invoices throughout their lifecycle stages to facilitate reconciliation and auditing.
• Invoice Batching is the process of batching invoices when the loan is requested on more than one Invoice. When more than one invoices are considered for financing they are batched to proceed further for financing. Financing of invoices is done in the same currency and for the same borrower (supplier in supplier-led financing). Batches must be of same payment due date.
• Invoice Financing in SCF is a process that enables the suppliers to obtain early payment for their invoices, thereby enhancing their cash flow and overall financial health.
• Invoice Repayment is the process where the buyer repays the invoices on the payment due date, which is used to settle the Finance obtained by the supplier.

Configuring Supply Chain Finance

The following property classes are specific to the SCF products:

Illustrating Model Products

The Supply Chain Finance module is pre-configured with the following model products.