The term also refers to practices used by banks and other financial institutions to manage capital invested into the supply chain and reduce risk for the parties involved.
[citation needed] The technique has been used in wealth management schemes to defraud investors, for example by the second largest Chinese real estate company, Evergrande Group.
With supply chain finance, it is the ordering party (customer) who initiates the process – usually a large company – choosing invoices that they will allow to be paid earlier by the factor.
[5] In September 2009 the Bank of England invited relevant UK financial bodies to establish a working group in order to review the supply chain finance market at that time.
Referred to as a type of "supply chain finance", investors would invest money in shell companies which they falsely believed existed to supplement working capital.
Moreover, as it is the ordering party that puts its liability at stake, it benefits from a better interest rate on the trade discount than the one that would have been obtained by going directly to a factoring company.
In a factoring process, if there is any problem concerning the payment of the invoice, it is the supplier that is liable, and has to give back the money he received.
Some reverse factoring platforms identified this problem, and therefore propose to the suppliers a more collaborative financing method: they choose themselves the invoices they want to receive cash, the others will be paid at due date.
[7] The reverse factoring permits all the suppliers to be gathered in one financier, and that way to pay one company instead of many, which eases the invoicing management.
This can also be simplified and speeded by using a reverse factoring platform combined with digitalization of business transactions (i.e. electronic data interchange).
With the supply chain lengthening as a result of globalization and offshore production, many companies have experienced a reduction of capital availability.
Specifically, suppliers receive pressure in the form of extended payment terms or increased working capital imposed on them by large buyers.
The coupling of information and physical control enables lenders to mitigate financial risk within the supply chain.
Suppliers are looking to obtain funds earlier in the supply chain at favorable rates, given buyers’ desire to delay inventory ownership.
Globalization of the United States and Western Europe’s manufacturing bases has resulted in fewer domestic assets that can be leveraged to generate working capital.
Another Asian financial crisis (such as the one in 1997) would severely disrupt US buyers’ supply chains by making capital unavailable to their suppliers.
The potential market for supply chain finance within the OECD (Organization for Economic Co-operation and Development) countries is significant and is estimated at $1.3 trillion[10] in annual traded volume.
[11] Based on these figures, the potential supply chain finance market size for the US is estimated to be approximately $600 billion in traded volume per annum.
As structured finance has been traditionally engineered and provided by banks specifically for large international trading companies, they do not use common foundations.
Once a robust information-based system is established, trading partners, logistics companies, and banks need to be able to access the information quickly and efficiently.
Knowing where the goods are in transit, the financial services provider can more confidently extend financing at various milestones within the supply chain.
There is a critical role missing in this equation, however, and that is the supply chain finance “translator” – the entity that is experienced in both logistics/transportation and financial services.
The translator is the subject matter expert, if you will, that can bring all entities to the table – transportation and logistics; banks; buyers; and sellers and speak the various languages and understand the needs of each party.
The following table explains this translator role: Some of the products that could be sold under the banner of Global Supply Chain Financing include, but are not limited to: 1.)
Global asset-based lending (GABL) – Enables middle market companies to monetize off-shore or in-transit inventory.
This results in an improvement in the net cash conversion cycle for the buyer while providing the supplier with capital at a reduced rate.
Given these discounted payments are paid post-goods receipt and approval, they don't carry any transaction risk which is common in cross border trade.
Given the complexities of modern financing and payment techniques, invoicement including invoice automation and discount management initiatives need a framework to ensure that programs are approached on a strategic basis which bridges the supply chain, purchasing, accounts payable and finance organizations.
Technology has now automated much of the credit evaluation process allowing program Funders access to real-time Buyer risk ratings across their portfolio.