Supply chain finance benefits both buyers and sellers

By Jonathan Heuser, Head of Product Solutions, Treasury Solutions | Published April 2025

A rollercoaster of tariff announcements and looming trade battles is taking U.S. companies on a fast and bumpy ride.  Corporate supply chains have already been grappling with a global landscape that has changed radically over the past five years, forcing companies to rethink how they prepare for future disruptions while managing the financial flow to not just remain viable, but competitive.  We have found that given the right circumstances, supply chain finance is a powerful tool that can help buyers and sellers collaboratively adapt to changing realities.

Powerful external forces

Make no mistake, the challenges companies are facing are more than minor tweaks of the status quo. New tariffs and heightened tensions between the U.S. and China threaten to fundamentally reshape the underlying system of world trade.  While this pivot from globalization has been evident for some years, the pace and scale of changes over the past few months have taken most market participants by surprise, created levels of uncertainty not seen for decades.

And this is far from the only challenge companies face as powerful forces continue to expose supply chain vulnerabilities. Lingering effects of the COVID-19 pandemic, and global conflicts from the Ukraine battlefield to Red Sea shipping lanes have compelled buyers and sellers to adopt new sourcing markets and trade routes. Even localized events such as a cargo ship blocking the Suez Canal, or another crashing into the Francis Scott Key bridge in Baltimore, and U.S. port labor issues can quickly snarl the supply of global goods.

As a result of these risks, companies are looking to diversify their supply chains and become more flexible. For example, many companies found themselves over exposed to China during the pandemic when many ports closed, and they are now diversifying to include other Southeast Asian countries. And, in some cases, U.S. companies are looking to shorten supply chains through nearshoring in places such as Mexico. These changes tend to increase costs and introduce complexity - and therefore risk.

Moreover, executives are reconsidering one of the guiding tenets of globalization: lean inventories. What once seemed like the epitome of operational efficiency now seems like a tremendous risk to operations given how suddenly a company can find itself without inventory. And with an uncertain future for trade with China and an evolving tariff environment, supply chains, in an effort to stay nimble and build in options, may become broader and more complex.

The trouble is that while companies are starting to keep more inventory on hand, the cost of that inventory has risen significantly, thanks to inflation and higher interest rates. And while the increases in inflation have slowed, and while interest rates have come down incrementally, these costs are now largely baked in.

All of this adds up to greater demand for working capital to fund inventory at a time when capital costs are high, and when companies are eager to keep a war chest of cash available to prepare for the unknowns of current market volatility.  This drives buyers’ desire to improve working capital efficiency by extending payment terms and paying suppliers more slowly. While suppliers are less keen on the idea, they are eager to maintain sales and key relationships.  And after all there is common ground: both parties would like to optimize financing costs and maintain liquidity. Indeed, it is exactly this common ground that supply chain finance builds upon.

Financing in the supply chain

To appreciate the powerful role that supply chain finance can play, consider the following example of a buyer looking to extend payment terms. In exhibit 1, the original payment terms are 30 days from date of shipment, so the supplier is financing 60 days of the cycle. And, because the supplier in this example is a smaller company than the buyer, its borrowing costs are higher (SOFR + 350 bps vs. SOFR + 150 bps). Now imagine the buyer, in a move to improve working capital, pushes payment terms out to 60 days from date of shipment. Suddenly the supplier, with the higher cost of capital, must finance the entire 90 days.

Here is the perfect opportunity to tap into the buyer's lower cost of financing. With supply chain finance, the bank - working at the buyer's request and seller's agreement --steps into the middle to provide financing to the supplier based on the buyer's credit risk.

Exhibit 1:

Supply chain finance in action

The basic framework for supply chain finance is straightforward. Once the buyer validates and accepts an invoice, the buyer notifies its bank that it intends to pay it in full at maturity. Based on this impending future payment, the bank offers the supplier immediate payment. The payment to the supplier will have interest calculated in advance and deducted from the proceeds. For example, rather than receiving $100 on Day 90, the supplier receives $99 on Day 10.

Finally, the buyer pays the full value of the invoice on the invoice maturity date.

The bank is in effect purchasing the receivable from the supplier, so the supplier has its cash in advance and is not subject to further recourse. Meanwhile, the buyer holds onto its cash for an extra 30 days. The arrangement bestows benefits to both sides: if the fit is right, it's a true win-win scenario.

Exhibit 2:

Building greater resiliency

Companies around the world are building up inventories to make their supply chains more resilient to disruption. Given the value tied up in these supply chains, companies need a strategy for managing working capital. Supply chain financing is one powerful way to manage the payable side of working capital, alongside other solutions such as letters of credit and card payments.

While this approach is not suited to all companies, in the right circumstances supply chain finance is a powerful working capital solution that benefits both buyers and sellers.

At Citizens our supply chain finance offering includes a set of tools to help clients improve liquidity, reduce counterparty risk, and support their extended supply chains - enabled by digital tools to enhance connectivity and efficiency.

The market environment means that U.S. buyers and sellers are facing not just working capital demands but increased supply chain complexity and the related risks. Citizens supports clients with an offering built on an individualized understanding of their unique business challenges. Our trade and supply chain finance solutions include tools to help clients improve liquidity, make domestic and cross-border payments, reduce counterparty risk, and support their extended supply chains - enabled by digital tools to enhance connectivity and efficiency.