# Supply Chain Finance: What It Is, How It Works, Example

![Supply Chain Finance: Technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and sellers in a transaction.](https://www.investopedia.com/thmb/Uq-pVY34o1ayeHEnVttct-ioGVQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/supply-chain-finance.asp-final-2328998fd43c4a0b8558e28a7d030e44.jpg)

*— Investopedia / Jake Shi*

## What Is Supply Chain Finance?

Supply chain finance (SCF) is a term describing a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction. SCF methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this paradigm, buyers agree to approve their suppliers' invoices for financing by a bank or other outside financier--often referred to as "factors."

By providing short-term credit that optimizes [working capital](https://www.investopedia.com/terms/w/workingcapital.asp) and provides liquidity to both parties, SCF offers distinct advantages to all participants. While suppliers gain quicker access to money they are owed, buyers get more time to pay off their balances. On either side of the equation, the parties can use the cash on hand for other projects to keep their respective operations running smoothy.

### Key Takeaways

*   The term supply chain finance describes a set of tech-based business and financing processes that lower costs and improve efficiency for the parties involved in a transaction.
*   Supply chain finance works best when the buyer has a better credit rating than the seller and can thus access capital at a lower cost.
*   Supply chain finance provides short-term credit that optimizes working capital for both the buyers and the sellers.

## How Supply Chain Finance Works

Supply chain finance works best when the buyer has a better [credit rating](https://www.investopedia.com/terms/c/creditrating.asp) than the seller, and can consequently source capital from a bank or other financial provider at a lower cost. This advantage lets buyers negotiate better terms from the seller, such as extended payment schedules. Meanwhile, the seller can unload its products more quickly, to receive immediate payment from the intermediary financing body.

Supply chain finance, often referred to as "supplier finance" or "reverse factoring," encourages collaboration between buyers and sellers. This philosophically counters the competitive dynamic that typically arises between these two parties. After all, under traditional circumstances, buyers attempt to delay payment, while sellers look to be paid as soon as possible.

## Example of Supply Chain Finance

A typical extended payables transaction works as follows: Let’s say the buyer, Company ABC, purchases goods from the seller, Supplier XYZ. Under traditional circumstances, Supplier XYZ ships the goods, then submits an invoice to Company ABC, which approves the payment on standard credit terms of 30 days. But if Supplier XYZ is in dire need of cash, it may request immediate payment, at a discount, from Company ABC's affiliated financial institution. If this is granted, that financial institution issues payment to Supplier XYZ, and in turn, extends the payment period for Company ABC, for an additional further 30 days, for a total credit term of 60 days, rather than the 30 days mandated by Supplier XYZ.

> **Important**
>
> Supply chain finance has been primarily driven by the increasing globalization and complexity of the supply chain, especially in the automotive and manufacturing industries.

## Special Considerations

Supply chain finance has recently slowed down due to the complicated accounting and capital treatment associated with this practice, mainly in response to increased regulatory and reporting requirements.

## Is There Another Name for Supply Chain Finance?

Supply chain finance is also known as "supplier finance" or "reverse factoring."

## What is Supply Chain Finance?

The term supply chain finance describes a set of tech-based business and financing processes that lower costs and improve supply chain efficiencies.

## What is Supply Chain Finance Good For?

Supply chain finance can optimize working capital for both buyers and sellers by providing short-term credit. It works best when the buyer has a better credit rating than the seller, as they can access capital at a lower cost.

## The Bottom Line

The development of supply chain finance technologies has largely been driven by an increasingly complex and globalized supply chain, as well as advancements in AI. The complex financial relationships between buyers and suppliers and detailed workflows make supply chain finance a good candidate for AI-enabled software solutions. AI and machine-learning algorithms can assist with manual data entry and review tasks, such as invoice processing, reducing both errors and the time needed to complete these steps.  

> **Article Sources**
>
> 1.  Research Nester. "[Global Reverse Factoring Market Trends, Forecast Report 2025-2037](https://www.researchnester.com/reports/reverse-factoring-market/6452)."
>     
> 2.  Fitch Ratings. "[Greensill Demise May Spur Reverse Factoring Accounting Change](https://www.fitchratings.com/research/corporate-finance/greensill-demise-may-spur-reverse-factoring-accounting-change-22-03-2021)."
>     
> 3.  iGTB. "[Use of Artificial Intelligence in Supply Chain Finance](https://www.igtb.com/blog/use-of-artificial-intelligence-in-supply-chain-finance/)."