For buyers and suppliers looking to increase cash flow and optimize working capital, there are alternative trade finance solutions such as supply chain finance or accounts receivables finance programs.
Supply chain finance, also known as supplier finance or reverse factoring, is a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to suppliers while providing the option for their suppliers to get paid early. Receivables sold under a supply chain finance program are nominally discounted at a rate tied to the credit cost of the buyer, which in most cases is better than the credit cost a supplier would pay to its own financing providers.
Accounts receivable financing allows companies to receive early payment on their outstanding invoices. A company using accounts receivable financing commits some, or all, of its outstanding invoices to a funder for early payment, in return for a small fee. Receivables sold or pledged under an accounts receivables financing program are discounted at the supplier’s credit cost – unless the supplier pledges or sells its entire portfolio of receivables and sets up a series of complex cash control measures that reduce risk to the lender but add substantial operational cost and complexity to the supplier.
For suppliers, these options provide the benefits of early payment and improved cash flow without the high costs associated with early payment discounts. These programs also improve cash flow for buyers and provide access to large sums of working capital. These funds can be used to make large-scale investments in initiatives that increase innovation and productivity, while also positively impacting metrics like cost of goods sold and days payable outstanding.