What is Supplier Finance?

Supplier Finance The majority of businesses are au fait with debtor finance, invoicing a client and then seeking finance against that invoice. When it comes to working capital the first area most businesses look at is their debtor days, what happens at the end of a transaction as being the issue with cash flow. The […]

May 30th, 2019

Supplier Finance

The majority of businesses are au fait with debtor finance, invoicing a client and then seeking finance against that invoice. When it comes to working capital the first area most businesses look at is their debtor days, what happens at the end of a transaction as being the issue with cash flow.

The commonly missed element is what happens earlier in the sales process, it is the element that most businesses don’t address or look to the wrong place to address.

If Invoice Finance covers the cash flow need at the end of the transaction then Supplier Finance covers the cash flow need at the beginning.

The irony is that businesses who use invoice finance are commonly using that capital to purchase new raw materials, supplies or stock.

The Process

The supplier finance cycle works like this:

Why Supplier Finance Works

There are a number of options for a business when it comes to financing a purchase from suppliers, typically these are:

Overdraft – Expensive and limited, often fails to grow in line with the business
Invoice Finance, Discounting or Factoring – Finances the end of the cycle when an invoice is raised, doesn’t influence when a supplier can be paid
Letter of Credit / Import Loan – More time consuming to arrange, requires the agreement of the supplier

Where supplier finance works is at the beginning of the cycle. It moves control of the date of payment to the business. This means that a discount for early payment can be negotiated, it also removes any consent that a letter of credit would require, this means that the business remains in control and the supplier is getting paid cash rather than an assurance of cash in the future.

The advantages of using this route are:

No need for supplier consent
Ability to obtain better terms and discounts from the supplier
Works for UK domestic and Import transactions
Where larger orders are being placed it allows for these to be ordered without impacting on cash flow elsewhere within the business
Grows as trading increases
No commitment with the option to finance as and when needed
Each transaction runs for up to 120 days, at which time it can be repaid from sales or repaid using post invoicing finance (factoring, discounting etc)
The supplier can be paid at whichever point benefits you the most, payment doesn’t have to be on day one, the timing of payment is your decision

For more information then get in touch.

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.