Supplier finance: a brief background

In a traditional commercial terms negotiation, Buyers andSuppliers have conflicting objectives: Buyers want to pay as lateas possible while Suppliers want to collect their money at theearliest. Supply chain finance programmes ease this tension byseparating the payment date from the collection date. Suppliers canget their money early (reducing their days sales outstanding) as abank provides financing for the period from the payment date to thecollection date. The cost of financing is usually borne by theSupplier. However, the superior credit rating of the Buyer ensuresthat the cost of funds is lower than is available to the Supplierunder normal circumstances.

The underlying trade flows in supplier finance are continuous asthe Supplier sells goods on an on-going basis to meet the Buyer'smanufacturing requirements. The tenor of invoices can differdepending on agreed terms with various Suppliers and acceptancedates. Consequently, there is a high reliance on operations tomanage discounting of invoices and collection of funds at maturityon daily basis.

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