What is Supplier Financing? How Does it Work?

Supplier financing is a component of supply chain financing and plays an important role in improving the cash flow and operations of many companies. It provides companies with credit facilities to buy goods, enabling them to grow the business.

This solution is used by manufacturing companies and product distributors. It helps them buy raw materials and products on credit, enabling them to fulfill new purchase orders or build inventory.

Unlike other types of financing, supplier financing expands the company’s existing financial capabilities. It can operate alongside most other financing solutions that a company may have in place, such as business lines of credit, invoice factoring, or asset-based loans.

1. How does supplier financing work?

Your company partners with a supply chain financing company that acts as an intermediary between your company and your suppliers. The finance company helps you purchase goods from your suppliers by providing credit accommodations to make those purchases. This solution is very different from a conventional supply chain financing solution that handles accounts receivable and accounts payable management and acceleration.

When you need to buy products (or raw materials), you place a purchase order with the supply chain financing company. The supply chain finance company, in turn, places a corresponding purchase order with your supplier.

The financing company extends credit to you and handles the supplier payment directly. Payment to suppliers is made in a number of ways and is based on a purchase agreement between them and the finance company. Note that payments to foreign suppliers are always made via a letter of credit or by paying the supplier as soon as goods ship.

The last step in the process occurs when the finance company sends you an invoice for the goods that the supplier shipped. The invoice has a small markup to account for the credit services that the financing company has provided. This invoice is paid on usual commercial terms with possible discounts for early payments.

2. Who qualifies for supplier financing?

Supplier financing is available to small and midsize companies that meet the following criteria:

  • Manufacture or distribute goods
  • Minimum of three years of operations
  • Minimum of two million dollars in annual revenues
  • Can provide accurate financial statements
  • Has product liability insurance
  • Credit insurable by Euler Hermes

Learn more about the qualification criteria for supplier financing.

3. Advantages of supplier financing

One of the most important advantages of supplier financing is that it is compatible with most forms of financing. It is not designed to replace your existing financing. Instead, it is designed to enhance your existing financing. However, you should check to ensure supplier financing is compatible with your specific lending covenants. Additionally, supplier financing is:

  • Invisible to your clients
  • Friendly to your suppliers
  • Easy to implement
  • Available on an “as-needed” basis
  • Available to small and midsize companies

4. Limitations of supplier financing

Supplier financing has two main limitations. The first one is that it covers only the costs of buying products or raw materials. It does not help you with labor or other costs. The second limitation is that it can help you only up to the amount that your company can be credit insured.

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