How To Finance Supplier Payments

Supplier payments will have a real impact on your business and its cash flow. If you are a growing business having to pay suppliers upfront while offering customers credit terms, the likelihood is you will need some sort of finance to help make those payments.

Winning a large new contract should be a time for celebration, but when the cheering has died down it can be the beginning of a cash flow headache. If you haven’t got the necessary working capital reserves or overdraft, you will need to think more innovatively about how to finance the transaction. Fortunately, there are solutions.

financing_the_trade_cycle_diagram

With the right combination of facilities, you could finance your entire trade cycle from customer order right through to customer payment. Other fundraising options include asset re-finance where you generate a cash injection for the business by using the assets already within it or a straightforward secured or unsecured loan.

The amount of funding you raise will obviously be a key consideration, but arguably what is more important will be the timing in the trade cycle that you can access the funds.

Let’s take a look at your options and discuss the benefits and implications of each:

OVERDRAFT

The good news is the funds are always available in the form of a revolving facility and the funds can be accessed at any time through the trade cycle. The downside is the facility is fixed and static so as your business grows the overdraft will remain at the same level. The risk for a growing business is overtrading.

BUSINESS LOAN

A business loan may be available to a business with a good track record of profits. It will provide a cash injection to the business, but while there is a cash injection there is also the negative impact on the cash flow of a monthly loan repayment. The facility is fixed and will not grow with your business; in fact, it is actually reducing. You also have the full loan all of the time when you may not actually need it. Arguably, a revolving facility is a better source of working capital.

INVOICE FINANCE

We are now looking at facilities where timing within your trade cycle is really important. Invoice finance allows you to access the cash tied up in an invoice. This can be up to 100% of the gross invoice value. However, the goods or service must have already been delivered. This is the importance of the timing. You can only access the value in the invoice once you have delivered the
goods so you will either need suitable credit terms from your supplier or you will have already paid the supplier. Depending on your cash flow requirement, invoice finance can be an excellent source of working capital to facilitate supplier payments. It is also flexible and grows as your business grows.

TRADE OR PURCHASE FINANCE

These facilities typically are ‘bolt on facilities’ to invoice finance. They allow you to pay suppliers upfront then, once you have the goods and they are delivered to your customer, the invoice finance facility will repay the trade or purchase finance. With regards to timing, this will allow you to access funds at the very beginning of the trade cycle.

STOCK FINANCE

Stock finance may free-up additional funding over and above an invoice finance facility. Generally it will provide 20-30% of the stock value as a revolving facility.


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