How Supplier Financing Helps Grow Your Business

Supplier financing is a form of supply chain financing that can help manufacturing companies and product distributors fulfill more orders and grow their businesses. In this article, you will discover:

  1. How supplier financing works
  2. The pros and cons of the product
  3. How to use it to your advantage

What is supplier financing?

Three products fall under the umbrella of supply chain financing. They are factoring, reverse factoring, and supplier financing. Factoring and reverse factoring are post-delivery finance services. They help you finance 30- to 60-day net term invoices so you can improve your company’s cash flow.

Supplier financing, on the other hand, is a pre-delivery financing solution. It can help you pay your suppliers so that you can bag larger deals or build inventory. It can be a great solution for manufacturing companies and product distributors.

How does it work?

Supply financing works by partnering with a finance company that acts as an intermediary between your supplier and your company. When you need to buy supplies, you place an order with the finance company. In turn, the finance company extends credit to your business and places a corresponding purchase order with your supplier.

The finance company pays your supplier, who manages the delivery of your product or supplies. Lastly, the finance company sends you an invoice for the product, which you pay at maturity. You can find a detailed explanation here.

There are two reasons why the finance company extends credit to your company. First, they check the commercial credit of your company through a standard credit service (like Dun and Bradstreet). Second, they get a credit insurance policy that covers your business. This last point is critical because supplier finance companies can work only with businesses that are credit insurable by Euler Hermes.

Benefits

The obvious benefit of supplier financing is that you can use it to buy the supplies needed to fulfill purchase orders. You can also use it to build inventory, which is something you cannot do with purchase order financing (a similar product).

This solution is also transparent to your clients and does not depend on who your clients are. It’s designed specifically to meet the needs of the backbone of today’s supply chain: manufacturers and product distributors.

Disadvantages

The solution does have a couple of limitations. The extent of your credit is limited by the amount of coverage that the finance company can get over your company. And you can get a line only if the company is credit insurable. Because of these limitations, supplier financing is usually available only to companies that have:

  1. At least 3 years of operating history
  2. Minimum yearly revenues of $2,000,000
  3. Reasonable financial statements
  4. Operations in the US or Canada

Lastly, this solution is available only to companies that sell or assemble products. It is not available to companies that sell services.

Boost your existing funding

One challenge of getting any type financing is that most financial products are not compatible with each other. This is because they usually encumber the same assets using a lien.

For example, if you have a line of credit, you can get a purchase order (PO) financing line only if the line of credit subordinates its position on accounts receivables. That is a big “if.” Most banks are not willing to subordinate their position on accounts receivable because it is your company’s most liquid asset. Consequently, you cannot get PO funding and your business misses opportunities.

Factoring and lines of credit are not compatible for the same reasons mentioned above. Lastly, most bank loans tend to add accounts receivable as security, even if they have other collateral. This means bank loans are also not compatible with other products.

Supplier financing sidesteps this problem. Technically, the finance company is not financing your business. They are just a supplier that has credit insurance. Therefore, they have no need to file a lien against any of your assets. Consequently, supplier financing integrates well with other financing products. However, as a precaution, you should check your lender covenants to ensure you are compliant with any vendor credit clauses.