As anyone who regularly deals with supply chain issuesknows, buyers and suppliers of goods and services usually haveconflicting interests. Supply chain managers at most companies areunder pressure to improve the company's cash efficiency, usually by extending paymentterms to their suppliers. But many suppliers lack the financialstrength or flexibility to adjust to longer payment terms. Forexample, if a supplier already has a highly leveraged balancesheet, increasing bank borrowing to finance short-term workingcapital may be prohibitively expensive. Extended payment terms mayalso expose suppliers to increased commodity or foreign exchangerisk.

When a large, well-capitalized company is buying goods orservices from a small or highly leveraged supplier, it may be in aposition to use its own balance sheet to support the supplier. A number ofstrategies have emerged in recent years to help buyers andsuppliers leverage the buyer's stronger financial position to helpthe supplier access lower-cost liquidity, often so that thesupplier can then offer the buyer extended payment terms. Most ofthese strategies involve monetization of the supplier's tradeaccounts receivable.

The most common forms of trade receivables monetization includeopen-account–based supply chain finance andnegotiable-instrument–based supply chain finance. Together, thesetwo strategies are often referred to as “structured vendor-payablesfinance” or “reverse factoring.” A third, related strategy isnon-recourse receivables purchase, which is often incorrectlyreferred to as “factoring.”