By: Sabeen Ahmed
The instrument that built SCF is now slowing it down
What obstacles hinder the continued growth of supply chain finance (SCF)? After growing fast for three decades, SCF has begun to slow over the last three years. This article discusses the roots of three challenges the industry needs to address and describes a current, working attempt to solve them.
The way SCF was originally structured, its risk mitigation system is based on the buyer’s unconditional promise to pay for each and every early payment provided to suppliers by SCF providers under a buyer-initiated, buyer-sponsored, and buyer-led programme. Most commonly, this is done in the form of the irrevocable payment undertaking (IPU) or a similar instrument. The IPU’s purpose is to protect SCF providers against non-payments or partial non-payments caused by dilutions – the buyer’s legitimate chargebacks, set-offs, withholdings, or counterclaims.
However, IPU-based SCF creates several issues for buyers.
The first is that the unconditional obligation to pay in full under an IPU may force buyers to create a separate process for settling dilutions with suppliers outside their normal accounts payable (AP) process. This occurs when a buyer that has committed irrevocably later needs to pursue chargebacks or set-off settlements apart from its regular AP workflow, as documented in a peer-reviewed study by George Shapiro, Volodymyr Babich, and David Wuttke in the International Journal of Production Economics. This creates additional administrative burden and cost. Buyers then need to want the programme strongly enough to be willing to deal with this encumbrance.
The second is that, under the relatively new Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) standards for supplier finance arrangements, IPU-based programmes create disclosure obligations for buyers. Even though the disclosure is made as a separate note under trade payables and does not require reclassification, it may still influence bank credit decisions and rating agency analysis.
But the most important problem with the IPU is that funding relies solely on the IPU or confirmed invoices – which is purely unsecured credit to the buyer. That is why SCF is normally available only to investment-grade and near-investment-grade buyers. There are over 300 million businesses in the world, and fewer than 8,000 of them are investment-grade companies. This means sub-investment-grade companies and their suppliers effectively have no access to SCF programmes – the overwhelming majority of the market that the industry was made to serve.
The good news is that serious attempts to solve these issues have recently been made. One example, documented in the study above, is the dynamic credit limit (DCL) method implemented at scale by The Interface Financial Group, together with a predictive artificial intelligence (AI) extension developed with AI1 Technologies.
Manage dilution instead of prohibiting it
The DCL method starts from the simple observation that dilution cannot be guaranteed away – it can only be moved. An IPU does not make chargebacks and set-offs disappear; it forces the buyer to settle them somewhere else, at its own cost. So instead of demanding an unconditional promise, the DCL approach lets the buyer keep its normal payment behaviour – deductions included – and manages dilution risk on the funding side, with data.
Under DCL, the buyer still initiates and leads the programme and still approves invoices. But it signs no IPU, gives no guarantee, and does not separately confirm invoices. Buyers retain full flexibility to take legitimate deductions through their ordinary AP process, exactly as they would without a financing programme. Because the buyer makes no unconditional payment commitment, the programme removes the main triggers behind the first two barriers: there is no separate off-system settlement process to maintain, and no irrevocable obligation of the kind that drives the supplier-finance disclosure concerns. And because the SCF provider’s protection no longer depends only on the buyer’s balance sheet quality, the investment-grade requirement – the third and biggest barrier – falls away.
What replaces the guarantee is a real-time, data-driven dynamic credit limit, recalculated continuously for every buyer–supplier pair.
A credit limit that recalculates with every invoice and payment
Rather than asking: “Will the buyer promise to pay in full?”, the DCL algorithm asks a more practical question: “Based on how this buyer and this supplier have actually behaved, how much of this invoice portfolio is safe to fund right now?”
Technically, the dynamic credit limit automatically determines what percentage of the supplier’s approved receivables is eligible for early payment at any moment. That percentage is built from three families of signals.
The first is the historical dilution behaviour of the specific buyer–supplier pair. The engine tracks how often this buyer reduces this supplier’s invoices after approval and by how much, at two levels: invoice-specific reductions and payment-level deductions not tied to any particular invoice. Stable, near-full payment history earns a higher limit; erratic or heavily diluted history reduces it. Crucially, this is measured for the relationship – not inferred from a corporate credit score, which the data show is a poor predictor of dilution.
The second is the supplier’s billing regularity and overall risk score. A supplier that invoices the buyer steadily generates a reliable stream of future receivables, which strengthens the provider’s fallback position. The risk score also incorporates the supplier’s forward-looking viability – its capacity to keep performing and generating invoices.
The third is a buyer-specific ceiling, recalibrated monthly by the provider, which caps total exposure to riskier buyers regardless of how good an individual supplier relationship looks.
Protection then comes from a layered automatic recourse structure instead of a guarantee. The first automatic recourse base is a reserve: the provider pays early on invoices totalling less than the full approved portfolio of invoices – for example, $950,000 of invoices against a $1 million portfolio – and the holdback automatically absorbs ordinary dilution. If dilution ever exceeds the reserve, the second automatic recourse recovers the shortfall from future payments flowing from the same buyer to the same supplier – a low-cost, fully digital mechanism that also motivates both parties to keep providing access to data. Only as a third and rare resort does the provider look to the supplier’s receivables from other buyers or escalate to collection.
One practical requirement deserves emphasis: DCL is a platform method, not a paperwork method. It depends on model context protocol (MCP) or application programming interface (API) integration with the buyer’s enterprise resource planning (ERP) system – drawing real-time invoice, payment, and adjustment data – and enough computing performance to recalculate limits within 15–25 milliseconds.
Ten years of live transactions say it works
The published evidence, based on ten years, 32,536 live DCL transactions, and over $5 billion in volume across a large number of suppliers and 24 buyers, says yes – on both sides of the trade-off. Suppliers received early payment averaging 90.5 per cent of approved receivables, against the lower flat advance typical of invoice financing – the realistic alternative for buyers and suppliers excluded from IPU-based SCF. At matched funding levels, invoice financing would have breached the first-recourse reserve 90 per cent more often than DCL. And only 0.26 per cent of DCL transactions ever escalated to collection, against 1.38 per cent under the invoice-financing counterfactual. More funding and less risk at the same time – the combination every funder wants and rarely gets.
The method is also forward-looking. A predictive AI framework trained on roughly 4.8 million invoice records now supplements the deterministic algorithm: one model flags whether a proposed invoice is likely to dilute – with an accuracy score (ROC-AUC) consistently above 0.91, where 1.0 is perfect, and 0.5 is no better than chance – and a second estimates by how much, feeding an expected-dilution figure into the limit before funding is released.
The fence around SCF is not structural
The IPU built the SCF industry, but it also fenced it in as an extra settlement burden for buyers, new disclosure visibility, and a hard restriction to a few thousand investment-grade names. The DCL method shows that the fence is not structural. When dilution is measured, priced, and buffered in real time, the guarantee becomes unnecessary – and supply chain finance can finally reach the much larger market of businesses that have been waiting outside.
