SUPPLY CHAIN FINANCING

A supply chain functions as a network involving individuals and entities contributing to the creation and delivery of a product to the end consumer. Supply chain financing, in contrast, represents a tech-based business financing process that reduces costs and enhances efficiency for the parties engaged in a transaction. This approach operates by automating transactions and monitoring the approval and settlement of invoices from initiation to completion.

The prominence of supply chain financing has grown in recent times, driven by the evolving nature of the business landscape. Businesses seek convenience and prompt payment of debts. Negotiated payment terms in the supply chain are often extended, which may not be favorable for most businesses. To address this, supply chain financing has emerged to establish equilibrium.

In supply chain financing, buyers consent to approve their suppliers' invoices for financing by a financial institution, often referred to as factors. Buyers with a good credit rating can source capital at a lower cost or partner with financial institutions that pay suppliers on their behalf. This allows suppliers to request early payment, with the financial institution deducting a small fee. This arrangement provides the buyer with extended payment terms.

Key Advantages of Supply Chain Financing:

- Reverse Factoring: Suppliers receive prompt payments, and buyers enjoy longer payment terms than those offered by suppliers.

- Optimization of working capital: Short-term credit is provided, benefiting both suppliers and buyers.

- Enhanced liquidity: Suppliers gain quicker access to funds, and buyers have extended time to settle their debts.

Supply chain financing not only benefits buyers and suppliers but also provides business opportunities for financial institutions. Institutions engaged in deposit-taking and lending can expand their business through this approach. In Kenya, particularly in the national government and counties, supply chain financing has facilitated continued service provision even in cases where funds have not been disbursed, as financial institutions are willing to pay their suppliers.

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