What Is Supply Chain Financing And How Does It Work

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Introduction to Supply Chain Financing for SMEs in Singapore

Supply chain ecosystems are like arteries of today’s globalised economy, allowing international trade to flow seamlessly. As world trade gets more and more complicated, competitive, and deglobalised, supply chain financing has evolved to address the demands of buyers and suppliers. This article explains what supply chain financing is, and how it is different from a business term loan, as well as explores the benefits and processes of both supplier financing and buyer financing for Singapore SMEs.

What is Supply Chain Financing?

There are two main types of supply chain financing: Supplier Financing and Buyer Financing. Supply chain financing funds the sale and purchase of goods by optimising the cash flow in the supply chain for both buyers and sellers who are small and medium enterprises. It enables the buyer to stagger payments according to their financial position, and allows suppliers to get paid earlier than commonly stipulated 60 to 90-days payment terms.

A type of trade financing, specifically Supply Chain Financing is often done through a financing partner, such as Funding Societies, who will first pay the suppliers and then collect back payment from the buyer at a later date. These financing partners offer various supply chain finance services to help SMEs leverage these benefits.

As such, the supplier gets an early payment to facilitate a smooth flow of materials to the buyer, and the buyer gets payment terms that suit its financial position. This supply chain financing option is gaining more traction regionally and locally, especially fuelled by the current economic climate where payment terms are often extended, to unlock liquidity in the supply chain.

Now that you know what supply chain financing is, the following sections will dive deeper into what sets it apart from business term loans, as well as the advantages of supply chain finance (for both Supplier Financing and Buyer Financing).

Is Supply Chain Financing Similar to Business Term Loan?

Supply chain financing is not the same as a business term loan. A business term loan is a one-off loan, whereas supply chain financing uses a facility or line, thereby allowing the loan to be used, repaid, and reused. Supply chain financing also offers SMEs flexibility to access funding in accordance with increased sales transactions instead of being limited to one specific amount.

While business term loans are usually for general business use such as for business expansions or the funding of day to day operations, supply chain financing involves the financing of specific sale of goods or transactions in the supply chain.

Supply chain financing also tends to have a shorter tenor and bullet repayments, as opposed to business term loans’ comparatively longer tenor and installments.

The Supply Chain Finance Process

As mentioned earlier, there are two main types of supply chain financing: Supplier Financing and Buyer Financing. Each has a slightly different process, so let’s delve into the general steps involved in a typical transaction and the benefits of each type of supply chain financing.

The Benefits of Supplier Financing and How It Works

In today’s economic turbulent climate spurred by the rising inflations rates and global economic instability, Supplier Financing, makes it easier for suppliers to weather through. Rather than waiting for customers (buyers) to pay invoices on time with lengthy payment terms, the supplier can submit invoices to financial institutions for early payment. By having more liquidity, suppliers will be able to operate their business without much disruption.

By tapping on Supplier Financing, the supplier can receive payment early and use the funds to optimise its working capital while the buyer maintains their existing payment procedure without disruption.

To better illustrate the process, refer to the Supplier Financing process by Funding Societies below:

Process for Supplier Financing

The Supplier sells goods and sends the invoice to the Buyer.
SME (Supplier) then submit copies of the invoices to Funding Societies before the invoice due date.
Funding Societies will pay the Supplier the Invoice amount minus financing fees on behalf of the Buyer.
Buyer will then pay Funding Societies the invoice payable amount on the invoice due date.

The Benefits of Buyer Financing and How it Works

Another type of supply chain financing, Buyer Financing allows buyers to pay their invoices at a later date, essentially getting an extended credit term without impacting the supplier’s cash flow. Instead of worrying about paying the supplier and a lack of cash flow, buyers can submit a request for the financing partner to pay the suppliers first and the buyer can then pay back the financing partner at a later time.

By tapping in on Buyer Financing, the buyer can optimise their working capital with a longer time for payment while the supplier can receive payment early and ensure consistent supply to the buyer.

The process for Buyer Financing by Funding Societies is as follows:

Process for Buyer Financing

Supplier, SME will deliver the goods and send invoice to the buyer
SME (Buyer) will send a payment request to Funding Societies
Funding Societies make full payment to the supplier on behalf of the Buyer
Funding Societies will collect payment from the SME (Buyer) on the financing due date.

A Strategic Advantage in Today’s Market With Supply Chain Financing

Supply chain financing offers a strategic advantage in today’s dynamic business environment by optimising cash flow and streamlining transactions. This can significantly boost the working capital of businesses within the supply chain and may potentially translate to improved supplier relations, enhanced buyer flexibility, and increased business agility.

If you’re ready to unlock the advantages of supply chain financing, you’ve come to the right place. Funding Societies is a trusted provider of supply chain finance services in Singapore. We offer a variety of solutions tailored to the specific needs of both suppliers and buyers.

Disclaimer: Funding Societies Pte Ltd is a crowdfunding platform licensed by the Monetary Authority of Singapore. The products offered by Funding Societies are governed by the Securities and Futures Act (SFA) and shall be construed and understood as a debt security regardless of the references to “loan”, “lending”, “finance” or “financing”. All third party trademarks product and company names are trademarks or registered trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them. View Funding Societies disclaimer notice here. The above article was published on 9 February 2021 and updated in 2024. It is accurate as of date of publication.