100% of the value of the invoice (typically amounts up to £10m)
Depends on your payment terms (e.g. 30, 60, 90 or 120 days)
Fee varies according to the lender, the amount and your buyer's credit rating
Within a day
To ease cash flow and improve liquidity so you (the supplier) can increase sales or mange seasonal cycles – you may also want to extend your payment terms
Any business (supplier) with a confirmed purchase order, especially if your buyer has a better credit score than you
Supplier finance (also known as ‘supply chain finance’ or ‘reverse factoring’) is a type of business cash advance, similar to invoice finance. If your business is the seller (or supplier) then you can benefit from the higher credit scores of the buyers in your supply chain. Your buyers can also lengthen their payment terms without impacting your cash flow.
If you need cash (working capital) to increase sales or manage your seasonal cycle, but are hampered by your credit score, supplier finance (supply chain finance) could help you. From the lender’s perspective, if your business has a credit-worthy buyer (a large, multinational, say) then the buyer is likely to honour your invoices and it can access capital (borrow from a lender) at a lower cost.
Supplier finance works like this:
• You (the supplier or seller) issue an invoice to a buyer (they are the ones with the high credit score in this example)
• Your buyer confirms to the lender that you have approved the invoice for payment
• The lender advances you 100% of the value of the invoice (minus a small fee)
• When payment is due, your buyer pays the lender directly
It’s helpful to see supplier finance (or supply chain finance) as a three-way collaboration – the lender helps both the buyer and the supplier, and all three parties have an arrangement together. This is why supplier finance is different to invoice finance, even if it seems similar from the supplier’s point of view. It also differs from trade finance. All of these types of funding help businesses manage cash flow but there are important differences between them.
Supply chain finance not a loan. There is no financial debt. Rather, it’s an extension of the buyer’s accounts payable. For the supplier (i.e. your business), it represents a true sale of receivables. There is no lending on either side of the buyer/supplier equation, which means there is no impact to balance sheets.
It’s advantageous all round. Your cash flow is stabilised because you (the supplier) get paid within a few days, rather than waiting for the ‘payment due’ date (which could be as long as 90 or 120 days). And the buyer benefits too, because they have effectively extended their payment terms without negatively impacting you – and without touching their working capital. In other words, the lender takes on any payment delay.
Supplier finance comes with a limitation: your supplier financing company can buy products on your behalf only up to the amount that your business can be credit insured. So you might not be able to use supplier finance for very large orders. You might want to consider purchase order finance, which is also ‘pre-delivery’.
That said, supplier finance has two main advantages over PO finance:
• You can use it if you are manufacturer (unlike PO finance)
• You can use it alongside existing financing (e.g., a line of credit) because it does not encumber assets (by contrast, a PO finance transaction is secured by your accounts receivable so might not work if you already have a lender in place (unless they subordinate their position)
PO finance – Purchase order finance (‘PO Finance’) is funding advanced to a supplier (from a finance provider) secured against a confirmed purchase order. You can use purchase order finance if you are a product distributor or reseller and need finance to fulfil a specific order. You can’t use PO finance if you directly manufacture products or if you just want to build inventory.
Loans from trade finance lenders (i.e. trade finance loans).
Revolving credit – A revolving credit line (facility) is a rolling agreement between you (the business) and a lender – in contrast to a fixed business loan. You can use it on an as-needed basis and pay it off when it’s convenient. You have a credit limit, in the same way you do with a business credit card or bank overdraft.
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