Supplier finance: a brief background

In a traditional commercial terms negotiation, Buyers and Suppliers have conflicting objectives: Buyers want to pay as late as possible while Suppliers want to collect their money at the earliest. Supply chain finance programmes ease this tension by separating the payment date from the collection date. Suppliers can get their money early (reducing their days sales outstanding) as a bank provides financing for the period from the payment date to the collection date. The cost of financing is usually borne by the Supplier. However, the superior credit rating of the Buyer ensures that the cost of funds is lower than is available to the Supplier under normal circumstances.

The underlying trade flows in supplier finance are continuous as the Supplier sells goods on an on-going basis to meet the Buyer's manufacturing requirements. The tenor of invoices can differ depending on agreed terms with various Suppliers and acceptance dates. Consequently, there is a high reliance on operations to manage discounting of invoices and collection of funds at maturity on daily basis.