In today's ever-changing business landscape, buyers and suppliers alike are seeking out creative ways to limit risk. One of the best ways to do this is through supply chain financing (SCF). SCF can help reduce risk by providing working capital, improving cash flow, reducing costs and ensuring the financial health of the supply chain. The ultimate purpose of SCF is to provide organizations with the tools they need to maximize their cash flow, manage their payment terms, and effectively receive payments on-demand. In this article, we explore what supply chain financing is and how it removes some of the largest risk factors for buyers and suppliers today.

Supply chain financing, also known as reverse factoring or vendor financing, is a method of optimizing working capital to help business owners access short-term liquidity within the supply chain. Essentially, a buyer (a company with a payable due to a supplier) offers their supplier (the company with the receivable) an early payment option at a discount, which is funded by a bank, secured lender, or the buyer themselves. Buyers match their payable terms with their receivable terms and suppliers can take early payment on all, some, or none of their invoices — at any time.

Having more access to funds puts the buyer in control, as they can offer incentives such as quicker payments if certain conditions are met, or automated decision-making processes. Supply chain interruptions can cause severe disruptions to a company's financial health, operations, and future opportunities. From liquidity constraints to supplier failure, and from late invoice payments to economic downturns, businesses have had to cope with increasingly volatile and challenging circumstances over the last few years. Fortunately, supply chain financing offers companies the opportunity to free up working capital and mitigate these risks.

By mitigating these risks while financially incentivizing supplier performance, businesses can make their supply chains smarter and more efficient. SCF provides faster payment turnaround, facilitating increased business confidence between buyers and sellers, thus enhancing supplier financial security. At the same time, SCF provides an uptick in security measures because these transactions are mostly digital in nature, meaning transactions can be verified against “the source of truth” (the buyer’s general ledger), a more secure movement of data and capital emerges. By having these increased safety standards, lenders can trust that their transactions will go through with minimized security problems or theft. In short, supply chain financing helps buyers reduce their exposure to supply chain risks without compromising on supplier relationships, or losing out on profits owing to liquidity difficulties.

The manual SCF process is not without its own set of risks and time-consuming tasks, however. At present, suppliers and buyers must often communicate through email and faxes to send purchase orders, invoices, and credit notes back and forth. This can lead to mistakes, missed opportunities, and increased payment terms for suppliers. On top of this, the review and verification process lenders must go through can be time-consuming, taking weeks to review and verify documents. They also often require extra resources, delaying payments significantly.

Supply chain financing is not just about reducing risk; it’s also about optimizing working capital and improving the bottom line for buyers and sellers alike. Innovative online tools allow lenders to obtain verification from buyers and sellers in days rather than weeks, accelerating cash flow. By reducing the risks and eliminating many of the manual processes, you streamline access to funds, while creating transparency for all stakeholders involved.

In today’s fast-paced ecosystem, supply chain financing must be integrated into a business’s overall financial strategy to not only minimize risk but to maximize work capital efficiency as well. Utilizing SCF leads to a greater confidence in trading partnerships, eliminating risks, and improving payment terms.  SCF is made more effective through automation, allowing companies to gain greater visibility into the process and access to funds more quickly. This helps to ensure that supply chain disruptions are reduced, and supply lines remain open.

The benefits of supply chain financing make this a key tool for organizations looking to reduce their risk exposure and optimize their working capital.

Jamie Clemons is CPA, co-founder, CEO, Artis Trade.