Supply Chain Finance

Supply Chain Finance has been available to large corporates for many years and is a sophisticated way of managing your working capital. In very recent times, these facilities have become available to SME’s with a turnover of around £5m and who are an insurable credit risk.

Supply Chain Finance allows a company to take advantage of the availability of cheap finance to effectively extend the time it takes to pay for the goods and services it receives thereby increasing its working capital or alternatively the company can look to reduce the cost of these goods and services thereby increasing its gross margin. This is achieved in both cases by agreeing a discount with suppliers for the early settlement of monies due to them.

The process is best described by way of two examples, one providing a free increase in working capital, the second, showing how a reduction in costs of purchases can be achieved.

Example One: Company is looking to achieve an increase in working capital of say 1 months expenditure.

Company A purchases goods to the value of £500,000 per month and settles these normally on 60 days. The company negotiates with its supplier that it will pay invoices due on Day 1 for a discount of 5% or 25,000.

Supply Chain Finance Company Pays £475,000 to the supplier on day 1 in settlement of the invoices in return for a promissory note or bill of exchange from Company A repaying the supply chain finance company in 90 day – effectively giving Company an additional months working capital of £500,000.

Cost of finance is say in this example 1.25% per month and costs Company A £17,812.50.

Company A has achieved a net decrease in costs of £7,187.50 (£25,0000 discount less costs of £17,812.50) and an increase in working capital of £500,000.

Example Two: Company is looking to achieve a reduction in costs of purchase.

In this case, Company B settles the finance at the same time as it would normally pay its creditors ie on 60 days. There is therefore no change in working capital. However, the cost of finance is now £11,875 against a discount of £25,000 reducing costs of purchase by £11,625 and effectively increasing gross margin of nearly 2.5%

To find out more, please contact our Account Management team.