Supply chain finance explained

What supply chain finance is

Supply chain finance (SCF), also called reverse factoring, is an early-payment arrangement set up by a large buyer for the benefit of its suppliers. The buyer approves a supplier's invoice for payment; a funder then pays that supplier early, and the buyer settles with the funder on the original due date. The defining feature is who drives it: unlike ordinary invoice finance, the programme is arranged by the buyer, not the supplier.

That distinction is the whole point. Because the funder is advancing money against the obligation of a large, creditworthy buyer rather than a small supplier, the early-payment cost is priced on the buyer's credit strength. Suppliers therefore get cheaper, faster cash than they could raise on their own balance sheet, and the buyer can offer it across a whole panel of suppliers from one programme.

How a programme works

The flow is straightforward once set up:

• The supplier delivers and invoices the buyer as normal.
• The buyer approves the invoice on its system, confirming it will pay.
• The supplier can then choose to be paid early by the funder, minus a small discount, or wait for the normal due date at no cost.
• On the original due date, the buyer pays the funder the full invoice amount.

Crucially, taking early payment is the supplier's option, invoice by invoice — useful in a tight month, ignorable in a flush one. The buyer often negotiates longer payment terms in exchange for offering the facility, which is where the arrangement starts to look like a balance-sheet tool as much as a kindness.

Who benefits, and the catch

Done fairly, SCF is genuinely win-win. The supplier gets reliable early cash at a rate tied to a strong buyer, easing the cash-flow squeeze that slow payment causes. The buyer can extend its own payment terms while keeping suppliers happy, improving its working-capital position without starving its supply chain.

The catch lies in how the buyer uses it. If a buyer stretches payment terms aggressively and points suppliers at the early-payment programme as the only way to get paid on time, the supplier ends up funding the buyer's working capital. There has been real-world controversy where over-reliance on these programmes masked weak finances. Suppliers should read SCF as a useful option, not a substitute for fair payment terms.

SCF versus arranging your own finance

The key difference from invoice finance is control and dependency. With SCF you can only finance invoices owed by buyers that run a programme, and you accept the buyer's funder, terms and timing. With your own facility you decide which invoices to fund, keep the relationship in your hands, and are not tied to any one customer's scheme.

For most suppliers the sensible position is to use a buyer's SCF programme where it is offered and fair, while keeping an independent line for everything else — buyers who do not run a programme, and the cash-flow gaps SCF cannot reach. Credicorp lends to limited companies directly, with no personal guarantee and no reliance on a buyer's scheme; you can explore our facilities or register to apply. This guide is educational, not financial advice.