Supplier financing is a type of supply chain financing that is designed for manufacturers and distributors. It helps them cover supplier expenses, enabling them to fulfill large orders and build inventory. This article covers the following subjects:
- Supplier financing vs. supply chain financing
- How does supplier financing work?
- Costs
- Qualification requirements
- Are labor costs covered?
1. Supplier financing vs. supply chain financing
The terms “supplier financing” and “supply chain financing” are often used interchangeably. Unfortunately, this is not entirely accurate. There are many important differences between these products.
Supply chain financing, often called “reverse factoring,” is a type of financing that enables suppliers to get a fast payment from clients. Supply chain financing can be helpful, as it improves the cash position of the company. However, it has some limitations.
The most important limitation is that supply chain financing is a form of post-delivery financing. As such, it does not help you with the supplier costs associated with the order. Also, reverse factoring is offered by clients, as an accommodation to their suppliers. Unfortunately, not all clients offer it.
Supplier financing, on the other hand, is a type of financing that enables companies to buy more goods from their own suppliers. In turn, they can use these products to deliver larger orders or build inventory.
The most important benefit of supplier financing is that is a type of pre-delivery financing. It is designed to help your business grow new orders and reach its potential.
2. How does supplier financing work?
Supplier financing works as a form of trade credit. Your company partners with a supplier financing company that intermediates purchases between your company and its largest suppliers. When you need to purchase goods, you place an order with the supplier finance company.
Once they receive the purchase order, the supplier finance company extends credit to your company. Then they place a corresponding purchase order with your supplier. Your original supplier handles manufacturing of the goods and delivers them to your company. The supplier financing company pays your supplier directly.
Once you get the goods, the supplier finance company sends you an invoice for the product, including a markup for the service. You usually have up to 120 days to pay the invoice, at which point the transaction settles.
3. Costs
Supplier financing companies charge for their services by adding a markup to the products. The markup varies based on the specific details of the transaction. The average markup ranges from 2% to 3% per every 30 days.
4. Who qualifies for supplier financing?
Qualifying for supplier financing is usually easier than qualifying for, or applying to increase, a line of credit. To qualify, your company must:
- Be a manufacturer or product supplier
- Be credit insurable by Euler Hermes
- 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
5. Supplier financing does not cover labor (or other) expenses
It is important to note that supplier financing covers only the cost of raw materials and products. It cannot be used to cover other manufacturing expenses such as salaries, electricity, etc.
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