What to Know About Supplier Financing

What to Know About Supplier Financing

What to Know About Supplier Financing

Businesses can find many ways to stretch their budget and free up capital. The most popular for those who sell goods, however, is with supplier financing. What is it? How can it lead to growth in your company? Here are a few of the most important things to know about this type of funding.

What to Know About Supplier Financing

What Is It?

Let’s start with the basics and define the term “supplier financing.” It’s also known as “supplier credit” and even “vendor financing.” In its simplest form, a company can order goods or supplies for resale or manufacturing, then defer the payment to the supplier for a period of time instead of paying the bill up front or even upon delivery.

Why is this good? Companies often don’t have the money to pay upfront, and having a bit more time to pay gives them a chance to create revenue with the products they have made from the supplies or even resell the goods they haven’t paid for yet. It builds a cushion where they can get the money to pay for the supplies before the bill is due. It’s also very common in global import/export businesses. When reselling goods to other countries, businesses often use supplier financing to delay payment.

Why Is it Called “Financing?”

Just like when you buy a car or home, you aren’t likely to pay for it all in cash up front. You have to get approved to finance it so that you can make payments later. You’re able to enjoy the benefits of the car or home, but you also sign a contract stating your timelines for paying the purchase price back over time.

The same thing happens with supplier financing, and it’s a way to help business owners stretch out their cash and meet other obligations while they wait to earn revenue from financed supplies. It’s especially beneficial for new businesses, who haven’t yet earned anything and need to make a big purchase commitment.

How Does One Qualify?

When the vendor agrees to delay payment of goods, it’s not as simple as just saying “you can pay for this next year.” No one is that nice. Supplier financing is an official extension of credit, and it sometimes requires a guarantee from a creditor, which may or may not be the supplier. They could use a third-party bank, much like a car dealership does, to hold the loan. You would then pay back the bank, and not the vendor.

The creditor would have you fill out an application, similar to applying for a loan or credit card, and may require you to guarantee the loan – offering up personal collateral if your business isn’t able to cover it all. Some suppliers use “unseen” creditors to guarantee loans; the business pays back the supplier as usual.

Why Supplier Financing is Good Business

It’s easy to see why supplier credit is good for the business doing the buying, as it gives them flexibility and doesn’t tie up all their cash into one large purchase. It’s also good for the supplier, however, who may be eager to move product and get items sold –even at the risk of being paid later. Supplier credit can often come with an attractive interest rate, so the supplier gets product moved, guaranteed sales (which increases the value of their company), and a little extra made in the form of interest.

For the company looking to move into a new product line or free up space in a warehouse, supplier financing can open doors to new things quickly and affordably. It’s especially beneficial if an outside bank or third-party financing company is carrying the debt burden.

How to Learn about Available Financing

If you are doing business as a company, and not an individual, then you likely already have many of the pieces in place to request supplier financing. Things like a tax ID number, buyer number, or purchase order number are used to identify you as a business customer and indicate that you will be making purchases under your business name. Sometimes, this is all that is needed for your supplier to offer you the choice of delayed payment with your next order.

If they haven’t offered it, however, ask. You could simply say that you would be more likely to place a larger order if you had financing available. Interested suppliers would then direct you to their financing department or a third-party bank or financier that handles this for them. The result may be anything from an invoice that doesn’t come until later to a full-fledged “credit card” specifically for their supplies.

The paperwork associated with financing may look like a simple promise to pay later, but it could be as involved as a small business loan application. The type of supplier and value of the products purchased will determine how rigorous the process is.

Here are a few additional tips for requesting supplier financing:

  • Demonstrate your ability to repay by referencing past orders and how quickly you paid each invoice.
  • Appeal to their need for future business by sharing your plans for buying in the next year. Show them that it will be a win-win if they can provide you with the supplies you’ll need via deferred payment instead of you going elsewhere.
  • Get the terms of the delayed financing nailed down, but leave the door open for early repayment with a possible deduction in fees or a discount. If you can pay a 45-day loan in 20 days, for example, would they knock off 2% in fees or the cost of goods?

You’ll find that there are more opportunities to negotiate the terms of supplier financing if you have a good history with a company and anticipate using them as a supplier for the future.

Beware of This

Just like any loan, the lender or credit guarantor can “call up” a loan at any time. This is when they require payment in full, regardless of the previous payment arrangement. Why can this happen? If the business who ordered the supplies is late in payment or make the credit agreement with false information, the supplier or lender can decide that they can’t risk having the loan out anymore.

There are a number of reasons why a loan may be called in, but most companies can avoid this by making payments on time. In rare instances, a supplier may go out of business or be bought by another company. The business restructuring could result in loans being canceled. You’ll likely be given a deadline to complete payment, or the loan could be refinanced with the new company under different terms.

This article was originally written on February 11, 2019 and updated on December 10, 2020.

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