We Need to Talk about Supplier Finance (aka Reverse Factoring, Payable Finance or Supply Chain Finance)
19 March 2021
We could start this blog by referring to the new normal, the great reset or even the lasting damage of a once-in-a-lifetime pandemic — but that is not the point of this blog post.
We want to discuss that many of the old certainties of pre-pandemic business life have continued no matter what. People make things, sell things through the value chain, on and upward to the end consumer. And central to this is the need to fund that process throughout every step. We are not talking about consumer credit here; we are talking about the day-to-day interactions of businesses throughout the supply chain and how funds are released to ensure the smooth transfer of products from the manufacturer to the distributor to the retailer and beyond.
Recently, the spotlight has fallen on a much overlooked and undervalued form of supplier finance. Instead of going into the nuts and bolts of how it works, we will look at how this 30-year-old finance tool helps from a suppliers’ perspective.
As a supplier, imagine that you have agreed to sell goods to a big retail buyer — an excellent opportunity for your business. There is a 30-day payment term clause in place, meaning that you may have to wait up to 30 days to receive payment for the goods supplied. Fine, you say, “I will have delivered these goods to the quality expected, and the buyer has said they will pay by the due date”.
Unfortunately, reality hits, and you realise that you need to finance your raw material and production costs. This involves maxing out your credit terms with your suppliers, trying to reduce your inventory and accelerating cash flow from other buyers — all of this before you have even covered the costs of your existing capital and borrowings.
The solution: supplier finance. Also known as reverse factoring, payables finance or supply chain finance. In other words, it is the financing of an invoice once the buyer has accepted to pay so that you receive payment upfront. The concept is not new and, as already referenced, is a financial tool that has stood the test of time.
It is also one of the safest ways for sellers to raise funds as goods travel through the value chain.
Most providers of supplier finance have product suitability processes in place such as payment terms being aligned to commercial terms and within industry norms. In doing so, it will be immediately recognisable as a trade payable.
Over the last decade, supplier financer has seen huge expansion and it is anticipated to expand further as suppliers are always seeking greater cash flow management. It is a cash management lending approach that lets companies help cover operating resources stranded in supply chains as a funding solution.
Supplier financing is a strategic approach intended to help both suppliers and buyers as producers are compensated early, and customers may prolong their payment terms.
Don’t overlook this vital form of funding. It may be relatively unknown, but it powers the goods you consume!