Let’s review a hypothetical scenario. A manufacturing company gets a very large purchase order from a reputable company. The order is so large that, to fulfill it, the manufacturing company needs to place substantial orders with its suppliers. Now let’s add a twist: let’s say that the manufacturing company does not have enough credit with its suppliers to buy all the goods it needs to fulfill the order. What then? Purchase order funding won’t help in this case – since it can’t be used in a manufacturing environment. One alternative is to combine factoring with a vendor guarantee.
A powerful combination
Why do you need both factoring and a vendor guarantee? If the company does not have sufficient accounts receivable to cover its vendor expenses (plus other operational costs), invoice factoring alone will not do the trick. The vendor guarantee, often referred to as a vendor assurance, can help bridge this gap for companies that don’t qualify for purchase order financing.
What is a vendor guarantee?
Basically, the vendor guarantee is an agreement between your company, your supplier, and the factoring company, in which the factoring company agrees to pay your supplier directly out of the proceeds of factored invoices.
The key term “out of the proceeds of factored invoices” means that the factor agrees to provide advances and rebates to your supplier until your obligations are fulfilled. Once your obligations are fulfilled, any additional funds are remitted to your company.
With the vendor guarantee in place, the manufacturing company in this example can get the needed credit and supplies from vendors. Then they can fulfill the order, factor the invoices, and have the factoring company pay suppliers from the proceeds.
How do they work?
Some key facts about vendor guarantees (vary by factoring company):
- Your supplier needs to agree to this arrangement
- The factoring company will pay your supplier only if you factor invoices. This point is very important!
- Once an invoice is factored, the finance company remits the funds (or part thereof) to your suppliers
- Any remaining funds, after paying your suppliers, go to your company
- This arrangement works best with suppliers that you have a good track record with
Will your suppliers agree to this program?
Why would a supplier agree to a vendor guarantee program? It gives them the chance to sell your company more goods with the assurance that they will get payments from the factoring company (if you factor the invoices). If they trust your ability to execute your plans, using a vendor guarantee should be to their advantage.
Since these business financing agreements can sometimes be complicated, it’s best to review them with a competent financial and/or legal professional to ensure you understand how they work.
Get more information
Are you looking for a factoring quote? We can provide high advances at low rates. For information, please call (877) 300 3258.