Understanding Supply Chain Financing

Companies use supply chain financing as a tool to improve working capital management, cash flow and profitability. The financial supply chain is the flow of money in the movement, purchase and sale of products and business goods. With supply chain finance, business buyers can lengthen the payment terms to suppliers. Suppliers are still paid early, but through alternative payers like a bank or other third-party intermediary who purchases the invoice and receives the full payment at the end of the invoice maturity term.

Benefits of Supply Chain Financing

Supply chain financing is beneficial for both suppliers and business buyers. For buyers, financing allows them to capture more early discounts and earn a greater return than in traditional money market investments. They also receive better payment terms, a more stable vendor base and optimized working capital.

On the supplier side, vendors gain cheaper access to capital and more predictable payments, which is particularly useful for smaller suppliers. This improves working capital management, cash flow and overall organizational financial health, while minimizing risk throughout the supply chain.

Challenges with Supply Chain Financing

The majority of companies are missing out on valuable discounts from suppliers for paying invoices early. For example, buyers can typically obtain a 2 percent discount for paying invoices within a 10-day window. However, most modern accounts payable (AP) departments are heavily reliant on manual, paper-based invoicing processes. This slows down the invoice processing cycle and causes buyers to miss out on valuable discounts that could translate into an annual percentage rate of 36 percent based on a 2 percent discount for payment within 10 days.

Using Electronic Invoicing to Improve Supply Chain Financing

Electronic invoicing solves the problems associated with paper-based invoicing while facilitating supply chain financing. There are several financial supply chain benefits companies can achieve by going electronic:

  • Reduce Invoice Processing Time: With electronic invoicing, companies can process invoices 18 percent faster than they can with paper-based invoices according to research by the Aberdeen Group. This technology can dramatically reduce the invoice receipt-to-pay cycle from 23 days down to five.
  • Lower Costs: Electronic invoices reduce labor costs associated with manual data entry and paper-based invoice processes. It also enables buyers to capture more early payment discounts, saving organizations money.
  • Enhance Visibility: Trading partners gain greater visibility into financing processes with access to real-time invoice status updates. Sellers benefit from more predictable payments and cash flow.
  • Reporting and Analytics: Electronic invoicing solutions come equipped with interactive reporting tools and real-time analysis that can help buyers and suppliers make better business decisions based on financial data.
  • Better Collaboration with Partners: Comprehensive financial information, real-time messaging and robust collaboration tools in an electronic invoicing solution enhance communications and relationships between business buyers and suppliers. Companies can exchange documents, invoices and information, and even negotiate terms directly through the electronic invoicing portal.

Direct Insite’s Invoices On-Line (IOL) solution is a powerful tool organizations can use to manage all of their supply chain finance requirements. With fully-integrated supplier portals, automatic invoicing scan and capture and real-time reporting tools, IOL helps organizations improve cash flow, financial supply chain management and financial stability. For more information about our comprehensive solution, give us a call at (631) 873-2909 to receive a personal consultation.

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