Supply chain strategy can be complicated—especially when you're working with a global supply chain. With purchases and orders flying all over the world, learning to get maximum efficiency and profits from your supply chain can sometimes feel like it requires a decree in economics.

Though it seems complicated, supply chain financing actually provides some relatively simple solutions for supply chains everywhere, whether you're a buyer, a seller or a manufacturer.

It's pretty straightforward. Basically, supply chain financing is low-cost financing that moves money around within a given supply chain. This frees up working capital or allowing for larger purchases with more flexible payment terms.

You'll find several related terms floating around in the supply chain financing world, like supplier financing or reverse factoring. Where and how those terms apply depends on where your business is in your supply chain. Supply chain strategy—and what kind of financing you might look for—depends on what sort of company you run.

Let's take a look at how it works.

Supply Chain Financing for Manufacturers

The overall challenge in general for manufacturers is having to purchase sufficient (but not too much!) raw material in order to be able to fulfill orders for their customers. Manufacturing requires spending money well in advance of collecting accounts receivable.

And that's where supplier financing comes in. The manufacturer, which may have many different suppliers spread out around the world, works with a finance company and gets credit approval. When the manufacturer needs to place orders, they go through the finance company, which pays all the suppliers on time, giving the manufacturer longer repayment terms than they would otherwise have—up to 90 days in some cases.

Since supply chain financing typically isn't handled by a bank, it doesn't affect creditworthiness to the same degree as traditional financing, and it also incurs lower costs than that of traditional financing. 

The effect this can have on the manufacturers supply chain strategy is huge. Purchasing decisions are more flexible, since they don't necessarily have to be as closely tied to when receivables are due. The manufacturer can prevent out-of-stock situations by buying sufficient raw materials without having to collect from their customers in order to stay current with their suppliers.

Supply Chain Financing for Buyer-Resellers

For companies that buy finished goods and resell them, supplier financing works just like it does for manufacturers. And the implications, again, can be huge. When your supply chain strategy has to account for international purchases, maintaining inventory (purchased at the right price, of course) is always challenging.

Supplier financing lets companies purchase for seasonal fluctuations without having to front huge sums of money. And when a shipment from China, for example, takes months to arrive, being able to spread out payment of large invoices can be the single thing that keeps a company afloat.

An additional benefit to buyers is the ability to scale up purchases to take advantage of larger quantity discounts. If you've been keeping one month's inventory on hand but can get a volume discount for ordering three month's supply, supplier financing with 90-day terms may let you rake in extra profit with more flexible payment terms.

Supply Chain Financing for Sellers

For companies that sell things—whether they're raw materials or finished goods—the financing option is often called reverse factoring (which sounds far more complicated than it actually is).

The way reverse factoring plays into supply chain strategy is it allows sellers to get paid more quickly than they otherwise would.

So if a seller typically offers 30 or 60-day terms to its customers, a finance company can purchase the seller's receivables, pay the seller immediately (for a small fee, of course) and collect the invoices when they're due.

Terms don't change for buyers, and sellers get their money right way, freeing up funds for more purchases or other expenses.

A big part of any company's supply chain strategy must grapple with finding the most efficient and cost effective way to move money through that chain. Supply chain financing opens up a host of opportunities to get quicker payment, bigger discounts, prepare for seasonal fluctuations and increase production in periods of growth.

And since supply chain financing typically isn't handled by a bank, it doesn't affect creditworthiness to the same degree as traditional financing, and it also incurs lower costs than that of traditional financing. In all, supply chain financing is a creative and elegant solution to problems posed by the growing global supply chain.

Read more articles on risk assessment.

Photo: Getty Images