The supplier financing program falls under supply chain financing, also known as reverse factoring. This type of financing can help improve cash flow and overall business operations. It also provides companies with credit facilities to purchase goods needed for growth and expansion (fulfilling new orders and building inventory), which is why it is a solution used by manufacturing companies and product distributors.
How the Supplier Financing Program Works
To implement the supplier financing program, your business must partner with a supply chain financing company. The financing company then serves as the middleman between your business and your suppliers to offer credit accommodations when you (the business) buy goods from your suppliers.
When buying products/raw materials, you would place the purchase order with your supply chain financing company and the supply chain financing company would then place the order with your supplier on your behalf.
The financing company will extend the credit to you, and they’ll oversee the supplier payment directly. There are many different ways suppliers can be paid, but it’s usually based on the purchase agreement between the suppliers and the financing company.
Once the goods from your supplier have been shipped, the financing company will send you the invoice (which may include a small markup for the services rendered by the financing company).
The supplier financing program is different from the traditional supply chain financing solution. The latter is a solution that takes care of accounts payable and the management and acceleration of accounts receivable.
One of the main advantages of the supplier financing program is that it’s compatible with other types of financing including invoice factoring, asset-based loans and a business line of credit. Unlike other solutions that function independently, supplier financing programs work alongside your company’s existing financial programs to build upon your existing capabilities already in place. Bear in mind that its scope and purpose is not to replace your current financing sources, but rather to enhance them.
You can check with your lender(s) or banks and inquire as to whether the supplier financing program is applicable with current your lending contract.
Other benefits of supplier chain financing include:
- It benefits your suppliers.
- Easy to implement.
- Available whenever you need it.
- Invisible to your clients.
- Applicable to small and midsize companies.
There are two primary disadvantages of the supplier financing program:
- Financing can only be applied for purchasing products or raw materials. It doesn’t cover other things such as labor costs or other incremental expenses.
- The supplier financing program will only fund up to the credit insured amount currently being extended to your business.
The supplier financing program can be confusing. If you desire the exact details as they relate to your personal situation, the finance experts at SMB Compass can help you.
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