Supply chain financing (or reverse factoring) is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer's behalf.
Unlike traditional factoring (where a supplier wants to finance its receivables), supply chain financing is initiated by the ordering party (the customer) in order to help its suppliers to finance its receivablesmore easily and at a lower interest rate than what would normally be offered. In 2011, the reverse factoring market was still very small, accounting for less than 3% of the factoring market.The current, global market size for Supply Chain Finance is estimated at US$275 billion of annual traded volume, which translates in approximately $46 billion in outstandings with an average of 60 days payment terms. It is still relatively small compared to the market size of other invoice finance methods such as factoring, which remains the largest trade finance segment and is primarily domestic in focus.
The potential market for Supply Chain Finance for the OECD (Organization for Economic Co-operation and Development) countries is significant and is estimated at $1.3 trillion in annual traded volume. The market serving European supply chains is approximately $600 billion. Based on these figures, the potential Supply Chain Finance market size for the US is estimated to be approximately $600 billion in traded volume per annum. A recent comprehensive research paper estimated that currently there are 200 GSCF programs of scale in place. These programs are run both domestically and cross-border and in multiple currencies. Still, the market potential is far from its capacity. If examining spending of large organizations, such as Lowe's $33 billion in spend, it becomes apparent that Supply Chain Finance programs usually require a multi-bank platform due to the credit and capital issues associated with banks.
SCF essentially works by finding a bank to pay a customer’s invoice from its suppliers early [in essence, a loan], for a fee, so that suppliers can improve their cashflow. [see graphic]
Any business concerned about its cashflow has to look at three important measures. How long does it take to get money in from customers; how quickly are suppliers paid; and what level of stock needs to be held.
Increasing the time taken to pay suppliers would have been an easy and immediate way of increasing cash availability. But the proposed shift from settling invoices in 30 days to making it 90 days would have really annoyed suppliers.
A solution was found through discussions with the company’s bankers that helped develop what was initially called reverse factoring. As it became more widely adopted, it became known as SCF.
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