The alternative finance industry is rapidly gaining momentum, and there’s no denying that the majority of the focus has been on SMEs. But given the growth centric benefits that go hand in hand with alternative finance solutions, should big businesses also be dipping their toes into the alternative finance pond? As far as we’re concerned, the answer is absolutely.
While SMEs operate mostly on a local level, supply chains for big businesses stretch across the globe. Networks can run deep, which means it can be difficult for suppliers to secure payments from large customers on-time. If one link of the chain cracks, the knock-on effect can be brutal.
This is where supply chain finance really steps up as a solution that’s designed not just to keep SMEs on their feet, but also to ensure big businesses enjoy a cash flow that’s smart, and fluid.
Defining supply chain finance
Also known as reverse factoring, supply chain finance sees sellers use a finance facility to fast-track invoice payments from a large customer. The contract is supported though the strength of the buyer’s business, which acts as security for the lender.
- Buyers often instigate the agreement, as they want to ensure that suppliers remain reliable.
- By securing faster payments for their suppliers, buyers are able to build healthy relationships with their sellers.
- Buyers enjoy increased liquidity, and the option of extending payment terms without having an adverse effect on the financial stability of the supplier.
- With fast access to receivables, suppliers enjoy improved efficiency and no longer have to endure lengthy payment terms.
- Suppliers are empowered with total control over their cash flows, which allows for flexible forecasting and growth.
- As the finance facility is based on the strength of the buyer’s business, suppliers aren’t dragged down by their own credit ratings.
- Suppliers enjoy flexibility over payment terms, and can request financing as and when its needed.
So how could supply chain finance benefit big businesses in today’s modern market? Britain’s major supermarkets are a primetime target, as they’re notorious for burdening SMEs with late payment terms.
For example, supermarkets like Tesco want to offer their customers a stellar choice of artisan jams, but when they insist on delaying invoice payments for up to three months, local producers simply can’t survive.
By initiating a supply chain arrangement, Tesco could keep its shelves stocked with artisan jams, and ensure that its suppliers receive payment on time. Simultaneously.
The supermarket giant would be able to maintain its advantageously long supplier payment terms, without compromising the financial stability of its suppliers, and the wider supply chain.
Supermarkets are just one example of how supply chain can benefit big businesses, though the concept can be applied to a myriad of other industries.
As the alternative finance insurgency grows, we’re certain that solutions like supply chain finance will soon become common practice for big businesses wanting to build mutually beneficial relationships with their suppliers.