At the heart of SCF is the paradoxical relationship between buyer and seller. The former wants to hold off on payment for as long as possible to stop cash outflow, which can be kept in the business. The latter wants to receive payment on time so they can make their next move and not waste time chasing the buyer for payment.
In this scenario, the buyer decides to extend the working capital line by paying a supplier as late as possible. This has the benefit of more cash being available for the buyer. But the supplier probably wouldn’t consider these terms of trade ideal.
This is where a SCF platform would come in. Let’s look at an example of how it would run in practice:
- A computer and laptop retailer buys goods from a semiconductor manufacturer. The computer seller and semiconductor manufacturer enter into a financial agreement with each other and a supply chain financier. This involves the retailer agreeing with the financier to pay the manufacturer immediately and the retailer to pay the financier later.
- The computer company and the manufacturer’s transactions happen. Then, the manufacturer raises invoices for the computer company.
- The computer brand uploads the invoices into the cloud facility of the SCF platform.
- Next, the manufacturer approves the invoices and gets them from the financier. The received payment is less invoice value than the financing charges for the quick settlement.
- The financier returns to the computer company and gets back the money for the invoices on the actual due date of the invoices. Any charges from the SCF representative might need to be paid by the buyer or the seller.
In other words, no loan has been granted. In the SCF model, it’s simply an extension of credit between the computer retailer and the semiconductor manufacturer. The retailer has control over cash outflow, while the manufacturer’s receivable time has dropped.