It’s impossible to grow a company if you cannot pay suppliers on time. Many manufacturing companies face this problem when they experience a growth phase.
The reason is often simple. As your purchase orders from clients grow, so do your orders to your material/product suppliers. However, if growth exceeds the amount of credit that your suppliers offer, your company can encounter operational and financial problems.
Exhausted your supplier credit?
You have a few options to handle this situation. The obvious choice is to ask your suppliers to increase your credit line. They may increase your line if your company has the trade experience with them. However, they may be unwilling to extend additional credit.
Another option is to pay down the amount you owe. This choice may seem obvious, but it also has consequences. Making substantial payments to your suppliers decreases your available cash. Furthermore, if you are growing, your cash reserves are likely low because your clients are still paying on their usual 30- to 90-day terms.
The alternative: Supplier financing
There is another alternative. You can finance your supplier costs using supplier financing. Supplier financing is a form of supply chain financing that is specifically designed for manufacturing companies. It is a trade credit facility that increases the amount of products/goods that you can buy from your suppliers. In turn, this financing allows your company to fulfill larger purchase orders, manage cash effectively, and grow.
How does supplier financing work?
The solution extends your available credit by having a supplier finance company intermediate some supplier purchases. When you need to buy products, your company places an order with the finance company.
The finance company reviews the order and extends trade credit to you. Then, the finance company places a corresponding purchase order with your supplier. Your supplier handles manufacturing and delivery of the goods. The supplier is paid directly by the finance company.
Once you receive the goods, the finance company sends you an invoice for the sale. The invoice has a small markup to account for the services. Your company has up to 120 days to pay the invoice and settle the transaction (learn more).
Advantages and disadvantages
Supplier financing is specifically designed for manufacturing companies, and it offers important advantages. The first advantage is that it enables your company to process larger orders. It can be an important tool for growth. Supplier financing is usually not considered debt by existing lenders, (check your covenants). Therefore, it can be used alongside lines of credit and other types of financing. Lastly, qualifying for supplier financing is much easier than getting a line of credit or getting a line increase.
Supplier financing does have two limitations. The finance company has a credit insurance policy to protect themselves from losses. Therefore, your company must be credit insurable by Euler Hermes to qualify. The second limitation is that supplier financing can be used only to pay supplier expenses. It cannot be used to pay for labour, rent, or other expenses.
How much does supplier financing cost?
The cost of supplier financing varies based on your needs and the complexity of the transaction. In general, companies charge 2% to 3% per every 30 days that you use the service.
To qualify for supplier financing, your manufacturing company must:
- Be based in Canada (or the US)
- Sell a minimum of $2,000,000 per year
- Have at least three (3) years of operations history
- Provide accurate financial statements
- Have product liability insurance
- Have existing and working relationships with suppliers
Looking for supplier financing?
If you are looking for supplier financing, submit this form. A credit manager will call you shortly.