Buyer led supplier financing program

Smaller businesses often have problems with cash flow since they do not receive their payments on time. Supplier financing looks to help these businesses by providing them with credit facilities for their various business functions.

Why do buyers need a programme for supplier financing?

Buyer led supplier financing programmes were created while keeping the following objectives in mind-

• Helps improve the working capital and cash flow of the supplier.
• Provides greater stability to the supply chain as a whole.
• Payment requests are reduced since the suppliers are paid at the earliest
• Interest rates charged by the financiers are based on the creditworthiness of the buyer; therefore, they are relatively low.
• Helps finance the supplier and develop long term relationships between the suppliers and the businesses.

Programmes run by the buyer

• Reverse factoring with the bank

Under this method, the buyer initiates a process to help the suppliers through financial support, financing the supplier’s receivables with the help of a bank. The bank plays the intermediary role between the buyer and the supplier. The bank pays the supplier’s invoices at lower interest rates, thus optimising the business needs of both the buyer and the supplier. Through reverse factoring, the supplier is paid in a relatively short period, and the buyer, on the other hand, gets more time to pay the invoices.

Reverse factoring is commonly used when the buyer is a large entity since they will have a better credit history and creditworthiness. This makes it a less risky proposition for the banks, bearing most of the risk.

• Third-party invoice factoring programme

This method provides a great solution to the buyers that cannot or do not want to obtain additional credit via traditional financing (banks). In-house financing enables the buyers to enjoy a purchasing process wherein the suppliers will have ties with a third party credit provider who agrees to provide financing against invoices. These tie-ups are beneficial to both the buyer and the supplier since the buyer can purchase his requirements via a credit facility. For the supplier, it means retaining a customer and ensuring that their funds are not blocked or at risk.

• Early pay programme

The suppliers can request early payment of their invoices as soon as the invoice gets through the approval process. The supplier may place the request on the dedicated online portal. The only costs borne by the supplier are in the form of the discount rate charged on the original invoice amount. Once the invoices are approved and available on the portal, the supplier places a request for the date on which they require the payment. Often, the buyer is rewarded with a discount on the total invoice amount for early payment, resulting in a higher return on capital than other low-risk investment instruments that are short-term in nature.

Industries or segments that use these programmes

The supplier financing programmes are designed to develop better and long-standing relationships between buyers and suppliers. The following industries make use of these programmes-

• Aerospace industry
• Automotive sector
• Textile industry
• Manufacturing sector
• Electronics industry
• FMCG industry
• Pharmaceutical