Working Capital and Supply Chain Management Glossary

Reverse Factoring, also known as Supply Chain Finance (SCF) or payables finance, is a financial solution that optimizes cash flow for both buyers and suppliers in a trade relationship. This buyer-initiated program enables suppliers to receive early payment on approved invoices through a third-party financial institution, while allowing the buyer to maintain or extend payment terms. As a cornerstone of modern working capital management, reverse factoring has gained significant traction among large corporations and their supply chains.

Dynamic Discounting is a financial arrangement that allows suppliers to receive early payment on their invoices in exchange for a discount that varies based on how early the payment is made. Unlike traditional static early payment discounts such as "2/10 net 30," dynamic discounting uses a sliding scale where the discount decreases as the payment date approaches the original due date. This flexible early payment discounting solution enables buyers to use their excess cash to generate returns while providing suppliers with greater control over their cash flow.

Working Capital, also known as net working capital, represents the difference between a company's current assets and current liabilities. This fundamental financial metric measures a business's operational liquidity and short-term financial health. Effective working capital management is essential for ensuring a company can meet its day-to-day operational expenses and short-term obligations while maintaining the flexibility to invest in growth opportunities.

A Funder in supply chain finance (SCF) is the financial institution or entity that provides the capital to facilitate early payments to suppliers in various trade finance programs. These third-party organizations—typically banks, specialized financial institutions, or fintechs—play a critical role in the SCF ecosystem by advancing payment to suppliers before the buyer's original payment due date, and subsequently collecting the full invoice amount from the buyer when payment is due. This intermediary position enables the funder to provide liquidity that strengthens supply chains while generating returns through fees or discount margins.

Invoice Approval is the formal business process by which a buyer verifies and authorizes payment for goods or services received from a supplier. This critical step confirms that the invoice is accurate, the goods or services have been properly delivered, and the purchase complies with organizational policies before payment authorization. In supply chain finance (SCF) programs, invoice approval serves as the gateway that enables suppliers to access early payment options, making it a fundamental component of modern working capital optimization strategies.

Supplier Onboarding is the systematic process of integrating new vendors into a company's procurement ecosystem, establishing the necessary documentation, compliance verification, and system connections required for effective business relationships. In supply chain finance (SCF) programs, supplier onboarding takes on additional significance as it includes enrolling suppliers in early payment platforms and ensuring they can effectively utilize financial tools to optimize their working capital. This comprehensive vendor onboarding process forms the foundation for successful long-term partnerships and enables access to strategic financing solutions.

An Early Payment Program is a structured financial initiative that enables suppliers to receive payment on approved invoices before the standard payment due date, typically in exchange for an early payment discount or cash discount. These programs address the competing working capital needs of buyers and suppliers by providing liquidity acceleration for suppliers while preserving or enhancing the buyer's cash position. Early payment programs have become a cornerstone of modern supply chain finance strategies, strengthening supplier relationships and optimizing working capital across entire business ecosystems.

Extended Payment Terms refer to commercial arrangements where buyers negotiate longer timeframes for invoice payment beyond standard industry practices—for example, extending from Net 30 to Net 60, 90, or even 120 days. These deferred payment terms represent a strategic working capital optimization tool that allows organizations to retain cash longer while maintaining supplier relationships. When combined with supply chain finance solutions, extended payment terms create a powerful mechanism for improving working capital without creating financial strain for suppliers who can access early payment options through third-party funding.

Net Terms represent the standardized timeframe within which a buyer must pay a supplier's invoice in full after the invoice date or receipt. These payment terms, commonly expressed as Net 30, Net 60, or Net 90, establish the contractual foundation for commercial credit relationships and form the backbone of business-to-business payment practices. Understanding net terms is essential for effective cash flow management, as they directly impact working capital requirements, supplier relationships, and the timing of cash conversion cycles across supply chains.

Procure-to-Pay (P2P) is the comprehensive business process that encompasses all activities from the initial identification of a purchasing need through the final payment to suppliers. This end-to-end procurement cycle integrates purchasing, receiving, accounts payable, and payment functions into a streamlined workflow that ensures efficient acquisition of goods and services while maintaining proper financial controls. Understanding the P2P process is essential for optimizing working capital management, as it creates the foundation for supply chain finance integration and establishes the operational framework for strategic payment timing and supplier relationship management.

KYC (Know Your Customer) is a comprehensive due diligence and identity verification process that financial institutions and businesses use to verify the identity, assess the risk profile, and understand the business activities of their clients or partners. In supply chain finance, customer identification procedures serve as a critical compliance gateway that enables suppliers to access financing programs while helping organizations meet regulatory requirements, prevent fraud, and maintain the integrity of their financial systems. These verification procedures have become increasingly important as global supply chains expand and regulatory scrutiny intensifies across international markets.

Trade Payables represent the money a company owes to its suppliers for goods or services received in the ordinary course of business operations. These commercial payables form a critical component of working capital management and appear as current liabilities on the balance sheet, reflecting ongoing business relationships and operational credit arrangements. Understanding trade payables is essential for effective cash flow management, supplier relationship optimization, and strategic implementation of supply chain finance solutions that can enhance working capital while maintaining proper accounting treatment.

An SCF Platform (Supply Chain Finance Platform) is a comprehensive digital system that connects buyers, suppliers, and financial institutions to facilitate supply chain finance transactions and program management. These technology platforms serve as the operational backbone for early payment programs, providing real-time visibility into invoice status, automated payment processing, compliance management, and performance analytics. Understanding SCF platforms is essential for organizations implementing supply chain finance solutions, as these systems enable seamless collaboration between all participants while maintaining security, transparency, and regulatory compliance.

A Multi-Funder Model is a supply chain finance structure that incorporates multiple financial institutions to provide liquidity for early payment programs, creating a competitive marketplace where funders bid for individual transactions or portfolios of invoices. This diversified funding approach enhances program capacity, reduces financing costs through competition, and mitigates concentration risk by distributing funding across multiple capital sources. Multi-funder structures have become increasingly important for large-scale supply chain finance programs where single-funder capacity may be insufficient or where cost optimization through competitive bidding creates significant value.

A Multi-Funder Model is a supply chain finance setup where several different banks or financial institutions work together to provide early payment funding for suppliers, rather than having just one bank handle everything. This multiple funding approach creates more financing capacity, better pricing through competition, and greater reliability because the program doesn't depend on a single financial partner. Understanding multi-funder models is important for finance staff because these arrangements have become increasingly popular for large supply chain finance programs that need more funding capacity and flexibility than any single bank can provide.

Compliance Risk is the potential for a company to face legal penalties, financial losses, or reputational damage by failing to follow applicable laws, regulations, and industry standards. In supply chain finance, regulatory compliance risk encompasses areas such as anti-money laundering (AML) requirements, Know Your Customer (KYC) procedures, financial reporting standards, and international trade regulations. Understanding compliance risk is crucial for finance professionals because violations can result in significant fines, business disruption, and damage to company reputation, making proper risk management essential for sustainable business operations.

A Risk Participation Agreement (RPA) is a legal contract that defines how multiple funding providers in a supply chain finance program share risks, returns, and responsibilities when working together to finance supplier early payments. This risk-sharing agreement establishes the rules for how different banks or financial institutions participate in the same financing program, including how they divide up transactions, share potential losses, and coordinate their activities. Understanding RPAs is important for finance professionals working with large-scale supply chain finance programs because these agreements enable much larger financing capacity than any single bank could provide while clearly defining everyone's roles and obligations.

Trade Payables Classification refers to the accounting treatment that allows supply chain finance obligations to remain categorized as trade payables (operational liabilities) on the balance sheet rather than being reclassified as debt or financial borrowings. This favorable accounting treatment preserves important financial ratios, avoids triggering loan covenant violations, and maintains clean balance sheet presentation even when suppliers receive early payment through third-party financing. Understanding trade payables classification is crucial for finance professionals because it represents one of the key advantages that makes supply chain finance attractive to CFOs who need to optimize working capital while maintaining strong financial metrics and regulatory compliance.

Accounts Payable (AP) represents the money a company owes to its suppliers, vendors, and creditors for goods and services already received but not yet paid for. As a fundamental component of a company's financial operations, accounts payable is recorded as a liability on the balance sheet and plays a critical role in working capital management, cash flow planning, and supply chain relationships.

Supply Chain Finance (SCF), also known as Supplier Finance or Reverse Factoring, is a set of technology-enabled financial solutions that optimize cash flow by allowing businesses to extend their payment terms to suppliers while providing the option for suppliers to receive early payment. This collaborative approach helps strengthen the financial health of supply chains by addressing the competing cash flow needs of both buyers and suppliers.