Supplir Finance

Supplier finance

Supplier finance is when a business provides low-cost finance to its suppliers, as part of a flexible settlement system. It is particularly used in manufacturing production, and improves cashflow for both buyer and supplier.

Sometimes called 'reverse factoring', supplier finance can be an option for businesses that regularly supply a large organisation that has an appropriate arrangement in place.

Early payment is provided - either by a bank or by a factoring company - to a supplier, based on invoices that have been qualified by the buyer.

Once the buyer approves the invoice, the payment - less a fee - is made immediately (and ahead of terms) by the financier. This allows the supplier to receive quick payment and allows the buyer to repay the financier according to the original contract terms.

There are a number of benefits to the supplier:

all of the invoice value (less the fee) is advanced immediately
the cost of borrowing is lower than with other methods
risk is reduced
cashflow is improved
The buyer effectively uses its stability and financial strength to support suppliers, which keeps the supply chain running.

There may be financial benefits to the buyer such as sharing revenue with the bank or from the supplier's improved margins. 'Soft benefits' include stronger relationships and lower costs arising from increased efficiency.