Understanding the Two Main Categories of Supply Chain Finance

The goal of Supply Chain Finance is to improve cash flow and reduce financial risk for all parties involved in the supply chain. By providing financing options and risk mitigation techniques, Supply Chain Finance helps optimize working capital and liquidity management. There are two main categories of Supply Chain Finance.

Receivable purchase products involve banks purchasing a portion or the entire receivable from sellers. This removes the receivables from the seller's balance sheet, transferring ownership to the bank. In return, the seller receives an advance payment with a margin for the bank.

Loan-based products involve banks providing loans to sellers or buyers based on their receivables, purchase orders, inventory, etc. In this category, the receivables remain on the seller's balance sheet, but they are used as collateral for the loan.

Both categories of Supply Chain Finance aim to provide financial support and flexibility to businesses in managing their cash flow and mitigating risks associated with supply chain processes and transactions.

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Mitigating Risks in Transferring Banks under Letters of Credit

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