Supply Chain Finance

Supply chain finance (SCF), also known as reverse factoring or confirming, is a financial arrangement that allows a buyer to extend its payment terms beyond what the supplier would otherwise accept, while enabling the supplier to receive early payment at a low cost. The mechanism involves a financial institution (a bank or specialist SCF platform) paying the supplier early -- often within 2 to 5 days of invoice approval -- and being repaid by the buyer at the extended payment date (often 60 to 120 days after invoice approval). The supplier gets fast payment; the buyer gets extended DPO; the financial institution earns a margin on the spread.

The key advantage of SCF over traditional factoring (where the supplier sells its receivables to a factor) is the credit basis. In SCF, the early payment is based on the buyer's credit rating rather than the supplier's. Because large industrial buyers typically have stronger credit ratings than their smaller suppliers, the financing rate the bank charges the supplier for early payment under an SCF program is lower than the rate the supplier could obtain independently. The buyer effectively "lends" its credit rating to the supplier's financing, creating a win for both parties.

How SCF interacts with AP

SCF programs operate on approved AP invoices -- the buyer must have reviewed and approved the invoice before it becomes eligible for early payment under the SCF arrangement. This means the AP approval process is the gateway to the SCF program: a faster AP cycle time enables earlier invoice approval, which enables earlier supplier access to SCF financing, which improves the supplier's liquidity and relationship quality.

AP automation is a prerequisite for effective SCF deployment. If the buyer's invoice processing takes 10 to 15 business days, the supplier's invoice is not approved until mid-month even if submitted on day 1. Approving the invoice on day 12 and offering SCF funding to day 90 gives the supplier 78 days of financing -- valuable, but less so than approving on day 2 and offering 88 days. The faster the AP cycle time, the more liquidity value the SCF program delivers to the supply chain.

When SCF makes sense

SCF is most beneficial when the buyer's credit rating is significantly stronger than the typical supplier's (the interest rate differential is large), when the buyer wants to extend payment terms beyond what suppliers would accept through direct negotiation, and when the supplier base includes businesses for which early payment certainty is genuinely valuable -- smaller subcontractors, overseas suppliers with currency risk, or suppliers in volatile industries with high working capital intensity.

For Australian industrial businesses, SCF is increasingly accessible through bank-provided programs (all four major banks have SCF platforms) and through independent SCF platforms that provide a technology layer on top of bank funding. The minimum viable buyer size for SCF programs has declined as technology costs have fallen, bringing SCF within reach of mid-market businesses rather than only enterprise accounts.