Supply chain finance, also called payables finance, is a good way for a business to boost its working capital to use in its daily operations. It works out well for both the buyer and the seller and helps them get the most out of their cash flow.
There are three parties involved in a supply chain finance set-up:
Invoice discounting is a way for businesses to get money by using their sales ledger as collateral. Companies can use their unpaid accounts receivable to get access to funds and boost their immediate cash flow.
Most of the time, there are two parties involved in invoice discounting:
From the borrower’s point of view, factoring and invoice discounting look up the supply chain to a company’s customers and use these debts as security. On the other hand, supply chain finance looks down the supply chain to the suppliers.
Some providers of supply chain finance try to pass it off as something else, but it’s really a type of working capital finance that ensures liquidity in the same way that an overdraft does. The biggest difference is that the money is only used to pay suppliers.
From a security point of view, it makes no sense for a lender to take a supplier invoice as security. If the borrower doesn’t pay back the debt, the supplier isn’t likely to help.