Supplier finance is sometimes called ‘reverse factoring‘ or ‘supply chain finance’. It is where a business provides low-cost finance to its suppliers, particularly in manufacturing. It improves cash flow for both supplier and buyer, and reduces working capital costs in the supply chain.

As with invoice financing, early payment is provided based on invoices. In this case, the buyer qualifies the invoices, and the third party makes the payment – less a fee – immediately. The benefits to the supplier include the invoice value being advanced immediately, the cost of borrowing being lower than with other methods, cash flow being improved, and the risk reduced. The buyer uses its financial strength and stability to support the supplier, keeping the supply chain running. The buyer may also benefit from improved margin, stronger relationships and lower costs due to increased efficiency.

Setting up supplier finance has three key phases. The first is the feasibility, wherein the payables financing history of the buyer and their trading terms with individual suppliers are analysed. This will result in an indication of the potential efficiencies and improvements in terms of costs, cash flow and payment terms.

The second phase is implementation. Once the optimum structure has been designed, the financing company will work with the suppliers to offer advice and training. All aspects of the supplier finance will be tested prior to the launch.

The third is processing, where the supplier finance program is launched and the buyer and supplier are supported. New suppliers can also be integrated when necessary.