What Is Supplier Finance, and How Can It Help My Business Succeed?

41% of respondents in a UK survey cited paying suppliers on time as one of the main challenges resultant from cash flow issues.

Depending on the nature of your business, being cut off by suppliers can paralyze your business, injure your reputation and send your existing customers elsewhere.

For most companies, supplier finance is instrumental in improving operations and cash flow.

How It Works

Supplier financing is a form of trade credit. Your company partners with a supplier financier who acts as a go-between between your business and its largest suppliers.

When your company needs to make purchases, you make an order with the supplier finance.

When the company receives the purchase order, the financing company extends credit to you. They then place a purchase order with your supplier.

At this point, your supplier handles the order and delivers the goods, and your supplier financing company pays them directly. 

Once you receive the goods, the supplier financier company sends you an invoice for the products. This invoice includes their markup fee for the service. The average markup ranges from 2% to 3% per every 30 days.

Your business has 30 to 120days to make the payment, at which point the process is complete.

You can find more info here about how supplier finance works.

Who Qualifies For Supplier Financing?

Supplier financing is available to small and medium-sized companies. However, you must meet the following eligibility criteria:

• You must be a distributor or manufacturer of goods
• Your business must have been in business for a minimum of three years
• Your business should have a minimum of two million dollars in revenue yearly
• You should have sound product liability insurance
• You must have accurate financial statements

As long as you are able to meet the above requirements, you will find his form of financing less stringent than traditional financing options such as bank loans.

Benefits of Supplier Finance

Supplier financing can deliver numerous benefits to your business. Here are the key ones.

1. Longer Payment Terms

Your financier allows you up to 120 days to make payments on goods.
For most business, this time is sufficient to honor the commitment, without a lot of inconveniences.

2. Direct Payment

Under a supplier financing arrangement, payment is made directly to the supplier.
In the business world where money has competing needs, direct payments ensure that the cash is not redirected to other business needs.

3. Discounts

If you can make payments early, your financier can transfer some discounts to you. This cash can be used for other business needs.

4. Inventory

Supplier finance ensures that you do not run out of inventory. This allows continuity of your business and enables steady revenues.

5. Reduced cash flow pressure

Supplier financing injects cash at the point that it’s required to aid a seamless trading cycle.

In a sense, it bridges the gap between receiving cash from consumers and paying suppliers. In this way, it reduces cash flow headaches.

6. Scalable Opportunity

This financing option improves your working capital and improves the liquidity of your business.

With supplier payments, you are assured you can meet large orders when need be. With this as a safety net, the apprehension of getting orders you can’t fulfill is eliminated

7. Expansion

Another advantageous aspect of supplier finances applies to businesses seeking expansion.

If you’re actively chasing a tender or an account that is not guaranteed, using your capital reserves for the purchase might leave you with dead stock and cash flow issues.

Supplier financing comes in right after you have a huge order in hand. If you do not get it, your company remains afloat.

The same applies during seasonal fluctuations. This credit facility allows you to quickly and flexibly increase and decrease output.

 8. Better Supplier Relationships

Once you receive goods, the financier makes a timely payment to your supplier as agreed contractually.

This promptness is something suppliers appreciate. This financial ability increases your reliability and value as a client.

You can use this clout to negotiate early payment discounts, reduced costs and improved terms of supply — all these to the benefit of your business.

9. Better Customer Terms

The availability of this facility means you have working capital to support business operations without creating cash flow issues.

For this reason, you can extend this to your customers through favorable payment terms on credit you extend to them.

This flexibility on your end improves competitiveness and helps you net and retain valuable customers.

Only 30% of small businesses get to reach ten years. Some of the reasons for this is inventory and cash flow issues.

Supplier financing addresses both so that a business can serve its customer base adequately.

10. Accessibility

This form of finance is available to small and medium-sized businesses. While these may be locked out from traditional business funding, they can be able to access supplier financing.

This makes it possible for them to stabilize and grow a solid customer base. Ultimately, this increases their chances of survival.

11. Increased Financial Control

Supplier financing takes the form of a pay as you go model meaning it’s devoid of set up and utilization fees.

Your business can use it when the need arises at no extra cost. This gives you more flexibility and control over your business finances.

Also, it streamlines your finance process, allowing you to focus your efforts on growth.

The fact that a business does not rely on paid customer invoices improves your control over repayment and deconcentrates your risk.

12. More Cash Allocation Options

With the inventory taken care of, a businesses can use its cash for other needs such as labor, insurance, and other general business expenses.

Aside from this, the business can focus on its marketing and retention initiatives.

Supplier Finance: The Ultimate Business Support

Supplier finance can be the lifeline of any business.

Any entity that sells goods must have access to inventory at the right time. When this becomes impossible, the business becomes untenable.

Even as you get financing for inventory, do not forget to be frugal about how you spend your cash at hand. What should you pay or not pay for using petty cash?

Check out our blog for insights on how to manage your petty cash.