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Five Myths about Supply Chain Finance

Five Myths about Supply Chain Finance


Five Myths about Supply Chain Finance

Supply Chain Finance (SCF) is growing fast: according to BCR Publishing’s World Supply Chain Finance 2024, global 2023 volume was nearly $2.4 trillion. What was once a niche service for investment-grade corporate buyers and their largest suppliers is now a critical financial tool that provides liquidity throughout the supply chain.   However, even with its move to the mainstream, SCF is often poorly understood by both buyers and suppliers who could benefit most from its use. Here are the five biggest myths about Supply Chain Finance:

    1.  SCF is only for the largest corporate buyers: One prevailing myth surrounding SCF is that it’s exclusively reserved for large multinational corporations with extensive supply chains. While it’s true that many large companies have adopted SCF programs, they’re not the only ones who can benefit from it. Advances in credit underwriting and technology now make it possible for mid-market and larger companies to leverage SCF, enhance their cash flow, mitigate risks, and strengthen relationships with suppliers. Fintech SCF providers like IFG offer tailored solutions that cater to the needs and scale of sub-investment-grade buyers, making it accessible to a broader spectrum of companies.

    2. SCF is a zero-sum game: Another misconception is that SCF involves winners and losers, where one party gains at the expense of another. Some perceive SCF as a mechanism for large buyers to extend payment terms to suppliers, resulting in a squeeze on their cash flow. However, SCF is designed to create mutually beneficial arrangements. By enabling suppliers to access early payment at a discount, they can improve liquidity and reduce financing costs – since SCF funding costs are often lower than rates suppliers could get on their own. Meanwhile, buyers can negotiate better terms with suppliers and strengthen supplier relationships, ultimately enhancing the efficiency of the entire supply chain.

    3. SCF is just another form of debt: SCF is often misunderstood as a form of borrowing, leading some to believe that it adds financial leverage and debt to a supplier’s balance sheet. In reality, SCF operates as a buyer-centric financing solution that leverages the buyer’s creditworthiness to provide financing to suppliers. It’s not a loan to the supplier but rather a mechanism for optimizing cash flow by aligning payment terms with operational needs. SCF programs, such as dynamic discounting and supply chain financing offer flexible financing options without burdening the balance sheet, making it an attractive alternative to traditional forms of financing.

    4. SCF programs are complex and costly to implement: There’s a misconception that implementing SCF requires extensive resources of the buyer, sophisticated technology, and complex processes, making it prohibitive for many companies. While implementing SCF programs does require careful planning and coordination, the best fintech providers offer a comprehensive solution, making adoption seamless and painless for corporate buyers. These SCF providers offer turnkey programs and cloud-based platforms that streamline onboarding, automate processes, and provide real-time visibility into transactions. By leveraging existing ERP systems and collaborating with trusted SCF partners, companies can efficiently implement SCF programs with minimal disruption to operations.

    5. SCF programs require buyers to sign guarantees of payment and change their AP processes. It used to be that corporate buyers sponsoring SCF programs had to sign a promise to pay all funded invoices without any deductions, often called an Irrevocable Payment Undertaking (IPU). This of course limited their ability to navigate legitimate deductions with suppliers. Additionally, buyers often had to modify their AP practices to accommodate early payment programs. No more. Best-in-class SCF programs like IFG’s have done away with the IPU, by using fast data to predict dilution and assigning each supplier a Dynamic Credit Limit in real time. As a result, buyers can enjoy the benefits of Supply Chain Finance with no impact on their AP operations and no need to guarantee payments.

Supply Chain Finance is one of the most powerful tools that corporate buyers can deploy to support their critical suppliers. And the latest technology, coupled with credit expertise and access to capital, can make its implementation seamless and painless.