Lets clean up the confusion around Supply Chain Finance Nomenclature

The term supply chain finance is not universally accepted nor well defined.

The traditional lending model is starting to give way to supply chain finance with the thought around using various events or triggers in the supply chain to release cash. See – Information Advantaged Finance

There are five main triggers that we see for supply chain finance that can involve taking information to trigger liquidity. They are:

1. Purchase order issuance

2. Materials ordered by supplier

3. Verification of shipping status

4. Invoice issued

5. Invoice approved

From our discussions, no bank, finance house, vendor or logistics company is active in more than one or two trigger points for finance. The one that has generated the most cross industry interest is early payment from buyer approved invoices.

If we look at early payment, it’s important to get the nomenclature around the various techniques right. It essentially comes down to did the company self-fund the early payment (using a pcard or dynamic discounting) or did a third party?

Self-Funded Early Pay

Dynamic discounting means the supplier gets paid earlier than the due date on the invoice and money comes from the balance sheet of the buyer. That implies two things: the DPO metrics of the buyer will change as the buyer extinguishes a payable earlier, and the buyer earns a discount in return. Essentially, dynamic discounting is an online request for change on a payment term. You can view it as ad hoc funding.

Funded by Third Party (Factor, Bank, Non Bank, Pcard)

What the market calls Supply Chain Finance – ie Taulia’s TED program or PrimeRevenue’s multi-bank model, or Orbian’s capital markets model --  is when the supplier is paid early but the money comes from someone other than the buyer.

This definition of third party funding can apply to a number of early pay techniques, including:

  • Bank Approved Trade Payable programs (or Bank Supply Chain Finance)
  • Pcards
  • Even factoring can fall under this definition, as it is seller-focused, based off an invoice issued and financed by a third party.

So as we navigate this world of supply chain finance, it is helpful for us to get on the same page. The International Chamber of Commerce has started a collective exercise with five organizations (see Another attempt to define Supply Chain Finance) but the focus is on trade finance and I assume will get tied up in lots of bureaucracy.

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