Reaping the Benefits of SCF: The Devil is in the Implementation
by Paul Vervoort, Associate Director, ConQuaestor Management Consulting
Supply chain finance, and especially reverse factoring, is on the rise. Starting in the car industry, this form of financing has gained increasing popularity in other industries as well. Although much attention is given to the virtues of this innovative way of financing and its bright future, less attention is paid to the implementation side of things. All nice and well, but why then does SCF not triple every year, and what exactly does it take to reap the real benefits? In this article, we try to give some of the answers, and propose an approach for interested companies to determine whether SCF is worthwhile for them and how implementation can be managed.
Supply chain finance principles
Reverse factoring is a form of supplier financing where suppliers sell their accounts receivable on a large creditworthy buyer to a bank, in return for quick payment by the bank. The bank, in turn, collects the receivables from the large creditworthy buyer on a longer term than the payment term which is usual between the buyer and supplier. This way, the large buyer uses its creditworthiness to get better payment conditions for both its suppliers and itself.
In schematic form, Figure 1 shows how it works.
As Figure 1 suggests, the process is simple:
1. Supplier delivers the ordered goods and sends the invoice to the buyer (as usual)
2. The buyer checks the delivery and the invoice (as usual)
3. After approval, the buyer sends the invoice to the bank for payment
4. The bank pays the invoice (-/- discount) to the supplier on behalf of the buyer (immediately after receipt)
5. The bank collects the advanced amount from the buyer (after an extended time period)
6. Supplier and buyer can monitor the status of the supplier invoices on the bank’s web portal.