Supply Chain Finance

Three parties take part: the buyer, the supplier and the funder. The Société Générale glossary describes the process in five steps. The supplier delivers and sends the invoice, the buyer approves it on a shared platform, the supplier asks for early payment, the bank pays in advance, and the buyer pays the bank when the invoice falls due. Because the risk is the buyer's, a small supplier gets money at a rate it could not get from its own bank.

The method began with carmakers, Fiat among them, in the 1980s, according to Wikipedia. Programs run on platforms that belong to the buyer, to one bank or to several banks, and onboarding each supplier, with its know-your-customer checks, is the slow part. TechTarget describes the technology as a cloud-based platform shared by buyer, supplier and bank, on which the bank can also see the purchase orders behind an invoice.

In factoring the supplier sells its receivables on its own initiative, priced on its own credit, as described on the factoring in Germany page. In reverse factoring the buyer sets up the program and its rating sets the price. Dynamic discounting uses no outside money at all: the buyer pays early from its own cash in exchange for a discount, as Tipalti describes.

For the buyer the effect is longer payment terms without hurting its suppliers. For the supplier it is cash soon after the invoice is approved. Long terms have a legal limit in the EU: the Late Payment Directive caps terms between businesses at 60 days unless agreed otherwise and not grossly unfair.

Investors complained that supplier finance was hard to see in company accounts. On May 25, 2023, the International Accounting Standards Board issued amendments to IAS 7 and IFRS 7. For reporting periods from January 1, 2024, companies disclose the terms of their programs, the amounts their suppliers have already received from funders and the ranges of payment due dates.

Greensill Capital, which mainly provided reverse factoring, filed for insolvency on March 8, 2021, after Credit Suisse froze about 10 billion dollars in funds tied to its products. In Germany, BaFin imposed measures and then a moratorium (in German) on its subsidiary Greensill Bank AG in March 2021.

Finance Loop is the meeting place for the banks, platforms and treasury teams behind supply chain finance programs. It connects the finance, IT and AI communities in Germany, Austria and Switzerland, with events in Frankfurt, Munich, Berlin and Hamburg.

Finance Loop supports When Banks Say 'No', a half-day payments seminar in Frankfurt for compliance, treasury, finance, export and legal teams on blocked payments, de-risking and sanctions. Finance Loop is also media partner of Capital & Code, a Frankfurt conference whose audience includes corporate treasurers who manage liquidity and risk.

Supply chain finance is a set of programs, set up by a buyer, that let its suppliers receive payment for approved invoices before the due date. A bank or other funder pays early and charges a fee based on the buyer's credit rating.

In factoring the supplier sells its invoices and pays a price based on its own credit. In reverse factoring the buyer starts the program and the price is based on the buyer's credit.

Dynamic discounting is early payment funded by the buyer's own cash. The supplier gets the money sooner and the buyer takes a discount in return.

The supplier, through the fee the funder deducts from the early payment. The buyer settles the full invoice amount with the funder on the due date.