Demystifying supply chain finance

Management of the physical supply chain has been transformed by technology led efficiencies such as bar codes, radio frequency identification (RFID), just-in-time manufacturing, offshoring and outsourcing.

By contrast, the financial supply chain has been relatively limited, giving business owners and financial directors only a handful of sometimes restrictive options to release funds caught up in the cash cycle.

However, there are innovations in this area of finance, and while some of these options may look similar to traditional forms of supply chain financing, they actually represent a significant break from the past.

In essence there are now four principal ways to monetise receivables:

1. Tungsten Early Payment
2. Factoring
3. Invoice Discounting
4. Asset Based Lending

Tungsten Early Payment – explained

Factoring – recap

Factoring involves the business selling its receivables to the factor company (either a bank or specific factoring brokerage). The business is required to hand over its sales ledger and usually collection will fall to the finance company. It is the loss of control of collection that may be beneficial for some organisations, but could also interfere with maintaining a quality customer relationship.

Invoice Discounting – revisited

With invoice discounting, the company enters into an agreement with a finance company to advance a proportion of its debtor book. Usually around 85% of an invoice value can be released and a financing charge will be made reflecting the credit risk of the business itself. The benefits of an invoice discounting facility involve the ongoing availability of cash. The drawbacks are the heightened level of involvement, audit and scrutiny from the bank or financial company as they need to satisfy itself that your internal processes are sufficiently in order and that the companies being billed are reliable.

Asset Based Lending – reminder

Simply put, asset-based lending is generally based on your accounts receivable and inventory that are used as collateral. You are essentially putting forecast revenue on the line to gain access to immediate working capital.

Asset-based lending can be a much-needed source of capital for companies that are rapidly growing. However, the chances of securing credit is reliant on the quality of receivables.

For more information on how to activate your Tungsten Early Payment account, please call our team on +44 20 7280 7846.

Alternatively click here to register your interest and someone from our team will get in touch.