Most organisations aspire to be on good terms with their suppliers; indeed, collaboration has become something of a buzzword amongst supply chain professionals.

Still, there is a problem: the nature of the relationship between buyer and supplier often pits the two parties against each other – the buyer wants to hold onto its cash for as long as possible, while the seller wants its bills settled at the earliest opportunity.

The result is that every organisation in a typical supply chain may feel that it is leaving value on the table because of the demands of the other side; their cash flows would be so much better if they could somehow find a way to unlock the power of the finance tied up in the network.

Recent research suggests slow and late invoices now cost small and medium-sized enterprise a staggering £250bn a year, taking into account the cost of chasing payments and the value of unpaid invoices.

Technology-driven finance

The solution to that dilemma comes in two parts: supply chain finance can indeed offer a way for both buyers and suppliers to take more value out of the supply chain, but to work effectively, it requires robust technology underpinning automated transactions.

Supply chain finance is most often employed when a larger buyer has better credit scores than its supplier and can therefore access capital more cheaply. Using this advantage, it is able to negotiate better payment terms so that its cash is retained for longer (or used for other purposes); meanwhile, the supplier can access the cheaper capital by selling its receivables – it can therefore secure payment earlier.

Imagine a transaction in which ABC Plc buys goods from XYZ Plc. Having received XYZ’s goods and, subsequently, its invoice, it promises to settle the bill in 30 days’ time.

Now, XYZ decides it wants its money more quickly – it can request immediate payment from ABC’s finance provider, using the approved invoice as security.

The finance provider hands over the money, minus a small discount for early settlement, and then gets its money back from ABC. It may well not require repayment for a further 30 days.

The net effects of this transaction are that XYZ has been paid much more quickly than usual for supplying its goods while ABC hasn’t had to sacrifice cashflow; in fact, it may even have secured a longer period in which to settle its bill – 60 days in this example. Unusually, given the nature of the supply chain, both parties are better off.

However, while supply chain finance is not a new concept, it does require robust technology solutions to work effectively at scale. Supply chain finance typically requires a digital platform on which transactions can be automated, tracked and settled.

That will be enhanced where buyers have digitised their supplier relationships, with key data and insight available on the creditworthiness, credibility and trustworthiness of the suppliers that want to participate.

Supply chain efficiency for all

Building such systems is in the interests of all parties. While supply chain payment issues are more likely to disadvantage smaller suppliers – and large buyers are often accused of throwing their weight around unfairly – even leaving aside the potential to secure extended payment terms, larger buyer can benefit.

What most such buyers need above all – and certainly more than short-term cost or cash flow gains – is a robust and resilient supply chain on which they can depend for the long term. Where small suppliers are struggling to prosper, or ever to survive, because of cashflow problems brought on by payment delays, the buyer’s interests may be compromised.

In this sense, collaboration is more than just a buzzword. By working together using innovative financing solutions and digital technologies that promote supply chain visibility, buyers and suppliers alike will both secure short-term gains – cash flow benefits – and long-term advantages – supply chain resilience.

The effect of such arrangements is to promote supply chain liquidity – both in the traditional sense of freeing up cash to move around the system, but also in the way in which buyers and suppliers can be freed from their traditionally adversarial roles. The aim is to reduce supply chain inefficiencies for all parties, rather than weighting the interests of one side over another.

Unlocking even a relatively small proportion of that trapped value, while simultaneously securing better payment terms for many larger suppliers, would provide a powerful boost to huge numbers of businesses.