A guide to supply chain finance

If you’re waiting for customer payments but need to pay suppliers now, supply chain finance could be the answer.

Supply chain finance helps keep your cash flowing. A financier pays your suppliers early on your behalf, and you repay them over an agreed period.

In this article, we’ll explain what supply chain finance is, how it works, the pros and cons, and how to apply for financing.

Key points:

• Supply chain finance lets suppliers get paid early while you spread the cost over time

• It may suit your business if you want to free up working capital and support suppliers without taking on debt

• Funding Options by Tide can help you quickly and easily compare a range of financing options, helping you secure the finance you need to bridge the gaps in your cash flow

What is supply chain finance?

Supply chain finance (SCF) is a way for businesses to keep cash flowing smoothly by working with their suppliers and buyers. You may also hear it called ‘reverse factoring’, ‘supplier finance’, ‘payables finance’ or ‘vendor finance’.

In simple terms, a bank or financier steps in to pay suppliers early for approved invoices, using the buyer’s stronger credit rating to make it happen. This means suppliers don’t have to wait weeks or months to get paid, while buyers get more time to settle their payments.

As well as speeding up payments, supply chain finance also makes the whole supply chain more stable. Suppliers get the working capital they need to keep operating, and buyers can hold onto their cash for longer.

Types of supply chain finance

Supply chain finance isn’t a singular product. There are several different types, tailored for different business needs:

• Reverse factoring (buyer-led): This is where the buyer sets up a financing arrangement so their suppliers can choose to get paid early. It’s a popular option because it’s driven by the buyer and helps suppliers access cash faster without taking on debt.

• Receivables purchase/factoring (supplier-led): Suppliers sell their unpaid invoices to a financier at a discount to get cash upfront. This avoids them waiting for payment while keeping their business running smoothly.

• Purchase order (PO) financing: Financiers provide funds to suppliers upfront so they can fulfil large orders, using the confirmed purchase order as security. This helps suppliers cover production costs before they even deliver the goods.

• Inventory financing: Businesses use their stock as collateral to unlock cash, which can be useful if they’ve got a lot of inventory tied up but need cash to keep things moving.

• Dynamic discounting: Buyers offer suppliers a discount if they’re willing to accept early payment. The earlier the payment, the bigger the discount.

• Distributor finance: This helps distributors buy stock from manufacturers by providing them with the cash they need upfront. This is more common in industries where distributors need to stock up on large amounts of goods.

How does supply chain finance work?

Supply chain finance speeds up payments for suppliers while letting buyers hold onto their cash for longer. Here’s how it works in practice:

1. Invoice approval: Once a supplier delivers goods or services and issues an invoice, the buyer approves it through a digital platform.

2. Early payment option: The supplier can then choose to get paid early, often within days, by a financier (usually a bank).

3. Financier pays upfront: The financier pays the supplier most of the invoice value upfront, minus a small fee (they’re relying on the buyer’s strong credit rating, rather than the supplier’s).

4. Buyer repays later: At the original payment due date, the buyer repays the financier the full invoice amount.

The whole process runs smoothly because the platform automates invoice matching and approvals, allowing suppliers to pick which invoices to finance.

Why use supply chain finance?

There are lots of reasons to use supply chain finance. Common reasons include:

• You need to free up working capital but want to make sure your suppliers are paid on time.

• Your suppliers are struggling with cash flow, and you want to support them while protecting your own supply chain.

• You want to extend payment terms (e.g. 60-90 days) to improve your cash position, but don’t want to hurt supplier relationships.

• You want to negotiate better rates by using your stronger credit profile to help suppliers access cheaper funding.

• Economic uncertainty or seasonality is squeezing cash flow, and you need a flexible way to keep operations running smoothly.

• You want to reduce supply chain risks by ensuring suppliers stay financially stable and reliable.

• You want to avoid more expensive financing options (like loans or factoring) and want a lower-rate alternative tied to your creditworthiness.

Benefits of supply chain finance

Supply chain finance gives you more control over your cash flow while keeping your suppliers happy. Here’s how it benefits your business directly:

• Hold onto cash longer: Extend payment terms to 60 or 90 days, freeing up working capital for growth, operations, or unexpected costs.

• Strengthen supplier relationships: Your suppliers can opt for early payments at a lower cost than loans, which means better pricing, priority service, and fewer disruptions for you.

• Lower financing costs: Because the funding’s based on your credit rating, it’s often cheaper than other short-term finance options.

• Free up your working capital: Manage cash flow more effectively, as repayments are spread out and aligned with your business cycle. But note that while the lender initially covers the supplier payments, you’ll eventually repay the amount (plus any agreed fees) over time.

• A smoother, collaborative process: Because the lender’s part of the arrangement, payments are more predictable and risk is reduced for everyone.

• Less admin and more efficiency: Online platforms can streamline invoicing and payments, resulting in less time spent chasing paperwork and more time running your business.

Downsides of supply chain finance

While supply chain finance can support your cash flow, it’s not without its challenges. Here’s what to watch out for:

• You might lose negotiating power: If suppliers grow reliant on early payments, they could expect it as the norm. And that could limit your ability to renegotiate terms or switch suppliers later.

• Extra admin for your team: Managing the platform, approving invoices, and onboarding suppliers takes time and resources. So if your team’s already stretched, this could add unnecessary complexity.

• It could affect your balance sheet: Depending on accounting rules, financed payables might need to be recorded as debt. That could make your business look more leveraged than it actually is – something investors or lenders may be cautious about.

• Suppliers take a hit on margins: Early payment discounts (usually 1-2%) eat into their profits, which might lead to higher prices for you down the line.

• Suppliers get locked in too: If they rely heavily on your financing for cash flow, they become more dependent on your business. That can reduce their flexibility and could weaken their bargaining power if they need to diversify.

• It doesn’t fix deeper cash flow issues: Relying too much on supply chain finance can mask problems like late customer payments or poor profitability.

How to apply for supply chain finance

Applying for supply chain finance could be simpler than you might think, and typically involves the following steps:

1. Check your eligibility: Make sure your business meets the basics, such as generating at least £100k in annual revenue, being UK registered, and having active buyer-supplier relationships with approved invoices.

2. Choose a provider: Consider banks, brokers, or online platforms like Funding Options by Tide. Many offer buyer-led programmes, and you can often apply directly through their websites or speak to an advisor.

3. Fill in the online form: Complete a quick application (it usually takes 5-10 minutes). You’ll need to share business details, financials, and examples of supplier invoices.

4. Wait for the underwriting review: The provider will run a soft credit check and verify your invoices or platform setup. You’ll typically get an offer within 24-48 hours, but the full process can take 2-3 weeks to complete.

5. Onboard and activate: Once you’re approved, sign the agreements and integrate the supply chain financing platform to upload your invoices. Your suppliers will then join the platform to access the early payments.

Examples of supply chain financing

A clothing retailer managing seasonal stock

A UK-based fashion retailer needs to stock up on winter inventory ahead of their busiest season but doesn’t want to tie up cash in unsold stock. They use supply chain finance to extend payment terms with their suppliers from 30 to 90 days. This gives them extra breathing room to sell their summer collection before paying for autumn/winter stock. Because their supplier’s paid upfront by the finance provider, they’re also able to negotiate a 5% discount for early settlement, saving them thousands while keeping their shelves fully stocked.

A food manufacturer smoothing out cash flow

A small food producer supplying major supermarkets faces a common problem: their customers pay invoices in 60 days, but they have to pay their own suppliers in 14 days. By using supply chain finance, they bridge this gap without taking on debt. Their suppliers receive immediate payment (minus a small fee), while the manufacturer spreads their repayments over 60 days, aligning them with incoming payments from retailers. This stops them from dipping into their overdraft and lets them take on larger orders without cash flow stress.

A construction firm securing bulk discounts

A mid-sized construction company wants to buy materials in bulk to cut costs but can’t afford the upfront expense. With supply chain finance, their suppliers are paid on day one, while the firm repays the funder over three months – interest-free. The 10% bulk discount they secure more than covers the finance fees, and they avoid project delays by having materials ready when needed.

Supply chain finance alternatives

Supply chain finance (SCF) isn’t the only way to ease cash flow or support suppliers. If your business doesn’t fit the SCF model, or you’re looking for something faster or more flexible, you could consider the following alternatives.

• Invoice finance: Get up to 95% of an invoice’s value upfront by assigning it to a lender. It’s quicker than SCF and doesn’t depend on your buyer’s credit, but fees can be higher if customers take longer to pay.

• Purchase order (PO) finance: Use confirmed customer orders to secure funding for fulfilment before delivery. This can work well for growing businesses but only covers the cost of goods, not ongoing expenses.

• Dynamic discounting: Pay suppliers early in exchange for a discount, using your own cash. There’s no bank involved, so it’s flexible, but you’ll need available funds to make it happen.

• Asset-based lending (ABL): Borrow money using assets like stock or unpaid invoices as security. It’s useful if you hold a lot of inventory, but you’ll need to keep track of the assets you’ve put up.

• Trade credit insurance & overdrafts: Insure yourself against late payments and use an overdraft to cover short-term gaps. It’s simpler than SCF and good for basic cash flow needs.

• Merchant cash advances: Repay a lump sum as a percentage of your card sales, so payments adjust with your revenue. It’s quick and unsecured, but best suited to businesses with consistent card transactions.

• Business loans & revolving credit facility: Access flexible funding for any purpose, with fixed repayments (loans) or on-demand cash (credit facility). Interest rates can be higher, but it’s straightforward and unsecured.

Gain control of your cash flow with Funding Options by Tide

If you’re waiting on slow-paying customers or need to bridge the gap between invoices and expenses, Funding Options by Tide could help you unlock the cash tied up in your supply chain.

With access to over 80 trusted lenders, we’ve already helped over 19,000 SMEs secure more than £1.1 billion in funding. So whether you need to pay suppliers faster, take on larger orders, or simply improve your cash flow, we’ll match you with the right supply chain finance solution.

Compare business loans and other cash flow finance options available through Funding Options by Tide.

FAQs

How does supply chain finance compare to trade finance?

Supply chain finance helps you free up working capital by letting suppliers get paid early on approved invoices, using your business’s creditworthiness to secure better terms.

Trade finance focuses on reducing risks in cross-border deals (e.g. letters of credit or export insurance) so it’s more about protecting transactions than optimising ongoing cash flow.

While supply chain finance works across domestic and international supply chains, trade finance is typically used for specific imports or exports.

How does supply chain finance compare to reverse factoring?

Reverse factoring is actually the most common type of supply chain finance. It’s when you, the buyer, set up a programme so your suppliers can receive early payments on invoices they’ve issued to you.

The main difference is scope – supply chain finance can also cover purchase order or inventory financing, while reverse factoring is purely invoice-based. But in practice, many businesses use the terms interchangeably.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.