How the Supplier Financing Program Works

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) buys 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 accounts receivable management and acceleration.

The Advantages

One of the main advantages of the supplier financing program is that it’s compatible with other types of financing (this includes invoice factoring, asset-based loans and a business line of credit). As opposed to other solutions that function independently, supplier financing programs work along side your company’s existing financial programs to build upon the capabilities already in place. Bear in mind that it’s not created to replace your current financing, but rather to enhance it.

Check in with your lender(s) or banks to ensure that the supplier financing program is applicable to your lending contract. Other benefits of supplier chain include:

  • It benefits your suppliers.
  • Easy implementation.
  • Available whenever you need it.
  • Invisible to your clients.
  • Applicable to small to midsize businesses.

The Disadvantages

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 anything else – no labor or other expenses incurred.
  • The supplier financing program can only fund up to the amount that your business can be credit insured.

The supplier financing program can be confusing. If you want to know more about it, SMB Compass can help! Don’t hesitate to speak to one of our lending experts. You can call us via phone call at (646) 569-9496 or email us at info@smbcompass.com. We’d love to hear from you.