Supply Chain Finance in Trade Finance
Finance priced on a strong buyer's credit, paid to its small suppliers. Here's how each technique works and who carries the risk.
Supply chain finance (SCF) is finance built around a trade relationship rather than a single borrower's balance sheet. The Global Supply Chain Finance Forum, the industry group whose standard definitions the ICC publishes, describes it as using financing and risk-mitigation techniques to manage the working capital tied up in a supply chain, with the financier able to see the underlying trade flows.
For a bank, the attraction is simple. A strong buyer (the "anchor") has many small suppliers who wait 60 to 120 days to be paid. If the bank can price the suppliers' invoices on the anchor's credit, the supplier gets cheap early money, the anchor keeps its payment terms, and the bank books low-risk assets.
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The Standard SCF Techniques
The Forum groups techniques by how the financier gets paid. Learn the group as well as the name; options in an MCQ often mix them.
Receivables discounting
Group
Receivables purchase
Who asks for it
Seller
Whose credit the price rests on
Seller's buyers (a pool or named debtors)
Factoring
Group
Receivables purchase
Who asks for it
Seller
Whose credit the price rests on
Seller and its debtors
Forfaiting
Group
Receivables purchase
Who asks for it
Seller holding a payment instrument
Whose credit the price rests on
The obligor on the bill or note, bought without recourse
Payables finance (reverse factoring)
Group
Receivables purchase
Who asks for it
Buyer sets up the programme
Whose credit the price rests on
The anchor buyer
Loan or advance against receivables or inventory
Group
Loans
Who asks for it
Seller or distributor
Whose credit the price rests on
The borrower, secured on the asset
Distributor finance
Group
Loans
Who asks for it
Distributor of a large manufacturer
Whose credit the price rests on
The distributor, with support from the anchor manufacturer
Pre-shipment finance
Group
Loans
Who asks for it
Seller
Whose credit the price rests on
The seller, backed by an order or an LC from an acceptable buyer
Dynamic discounting
Group
Advanced payables
Who asks for it
Buyer
Whose credit the price rests on
No financier: the buyer pays early from its own cash
| Technique | Group | Who asks for it | Whose credit the price rests on |
|---|---|---|---|
| Receivables discounting | Receivables purchase | Seller | Seller's buyers (a pool or named debtors) |
| Factoring | Receivables purchase | Seller | Seller and its debtors |
| Forfaiting | Receivables purchase | Seller holding a payment instrument | The obligor on the bill or note, bought without recourse |
| Payables finance (reverse factoring) | Receivables purchase | Buyer sets up the programme | The anchor buyer |
| Loan or advance against receivables or inventory | Loans | Seller or distributor | The borrower, secured on the asset |
| Distributor finance | Loans | Distributor of a large manufacturer | The distributor, with support from the anchor manufacturer |
| Pre-shipment finance | Loans | Seller | The seller, backed by an order or an LC from an acceptable buyer |
| Dynamic discounting | Advanced payables | Buyer | No financier: the buyer pays early from its own cash |
Case: A Payables Finance Programme in Pune
An auto major in Pune buys components from 300 small vendors on 90-day terms. Its bank sets up a payables finance programme.
- 1
Anchor onboarding
The bank sanctions a programme limit on the anchor. The anchor agrees to upload approved invoices and to pay the bank in full on the due date.
- 2
Vendor onboarding
Vendors sign a receivables purchase agreement with the bank. Joining is the vendor's choice, not a condition of supply.
- 3
Invoice approval
A vendor in Chakan ships brake assemblies worth ₹40 lakh. The anchor accepts the goods and approves the invoice on the platform, confirming it will pay on day 90.
- 4
Early payment
On day 10 the vendor asks for funds. The bank buys the receivable and pays ₹40 lakh less a discount for 80 days, priced on the anchor's rating, not the vendor's.
- 5
Settlement
On day 90 the anchor pays the full ₹40 lakh to the bank. The payable stays a trade payable on the anchor's books until then; the anchor's terms have not changed.
Why It Matters in Global Trade
A growing share of world trade moves on open account: the exporter ships and simply invoices the buyer, with no letter of credit or collection in between. That leaves the exporter carrying both the credit risk and the funding gap. SCF fills that gap without the document checking of an LC, which is why banks treat it as the open-account counterpart to documentary trade.
In India the same logic drives TReDS, the RBI-authorised platforms where MSME invoices on large buyers are discounted without recourse to the MSME. Since June 2023 RBI has allowed every entity permitted to do factoring business under the Factoring Regulation Act, 2011 to finance on TReDS, which widens the pool beyond banks and NBFC-factors.
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The Risk Banks Watch
Payables finance can hide how much a buyer really owes. If an anchor stretches vendor terms and the bank finances the longer terms, debt-like obligations sit in "trade payables". The Forum itself has warned about misuse after companies that abused these programmes collapsed. Banks therefore limit extensions of payment terms and review the anchor's total supplier-finance exposure.
How the IIBF Exam Tests This
Expect a short scenario that asks which technique is being described, or who carries the credit risk. The usual trap is reverse factoring: candidates see "factoring" and pick the seller's risk, when the price rests on the buyer. A second trap is dynamic discounting, which involves no bank finance at all. There are no ICC rules for SCF; an option citing them is wrong.
FAQs
What is the difference between factoring and reverse factoring?expand_more
In factoring the seller sells its receivables and the financier looks at the seller and its debtors. In reverse factoring (payables finance) the buyer sets up the programme and the discount is priced on the buyer's credit.
Is supply chain finance a loan to the supplier?expand_more
In payables finance and receivables discounting, no: the financier buys the receivable. Distributor finance and loans against receivables or inventory are loans.
Are there ICC rules for supply chain finance?expand_more
No. The ICC and the Global Supply Chain Finance Forum decided not to draft ICC rules for SCF. They publish standard definitions of the techniques instead.
How is TReDS related to supply chain finance?expand_more
TReDS is India's regulated platform for discounting MSME invoices on large buyers, without recourse to the MSME. It supports both seller-initiated factoring and buyer-initiated reverse factoring.
Next steps
- TReDSarrow_forward
- Import Financearrow_forward
- Factoring vs Forfaitingarrow_forward
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