Supply Chain Finance

Supply chain finance (SCF) refers to technology-enabled financing solutions that lower financing costs and improve efficiency for buyers and suppliers in a commercial transaction. SCF automates invoice approval and settlement workflows and uses short-term credit provided by banks or nonbank financiers to optimize working capital and liquidity for both parties.

Key takeaways

• SCF uses a financier to pay suppliers early while giving buyers extended payment terms.
• It works best when the buyer has stronger credit than the supplier, allowing access to cheaper capital.
• SCF improves cash flow and reduces working-capital strain for suppliers while enabling buyers to extend payables.
• Modern SCF programs are increasingly automated and can leverage AI for invoice processing and exception handling.

How it works

1. Supplier ships goods or services and issues an invoice to the buyer.
2. The buyer approves the invoice and authorizes a financier (often a bank or specialized platform) to pay the supplier early.
3. The financier pays the supplier—typically at a small discount—so the supplier receives cash sooner.
4. The buyer repays the financier at an agreed later date, effectively extending the buyer’s payment terms.

This arrangement is often called reverse factoring or supplier finance because the buyer’s creditworthiness is used to secure lower-cost funding for the supplier.

Example

Company ABC (buyer) purchases from Supplier XYZ (seller), with normal terms of 30 days. Supplier XYZ needs cash immediately, so the buyer’s financier pays XYZ after invoice approval but charges a small fee. Company ABC then repays the financier in 60 days total, effectively extending its payable period while XYZ receives immediate funds.

Benefits

• Improves suppliers’ liquidity and reduces days sales outstanding (DSO).
• Extends buyers’ payment terms and optimizes their working capital.
• Reduces financing costs for suppliers when tied to a higher-rated buyer.
• Automates invoice processing and payment flows, lowering manual errors and administrative burden.

Special considerations and risks

• Accounting and regulatory treatment can be complex; recent regulatory scrutiny has affected some programs.
• Overreliance on extended payables can mask liquidity issues for buyers.
• Program design must address counterparty risk, platform security, and transparency to stakeholders.
• Pricing and eligibility typically depend on buyer credit; smaller or higher-risk suppliers may still face limited access.

Other names

SCF is commonly called supplier finance or reverse factoring.

When to use supply chain finance

SCF is suitable when buyers seek to strengthen supplier relationships, stabilize supply chains, and optimize working capital, and when suppliers need faster access to cash without raising their own borrowing costs. It is especially useful in industries with complex, global supply chains (e.g., manufacturing, automotive) where timely supplier liquidity matters.

Conclusion

Supply chain finance is a collaborative financing approach that leverages technology and the buyer’s credit to provide short-term liquidity across a supply chain. Properly structured, it benefits both buyers and suppliers, but it requires careful attention to accounting, regulatory, and operational design. Advances in automation and AI make SCF programs more efficient and scalable, particularly for invoice processing and exception handling.