Supply chain finance

How supply chain finance works

A large buyer, say a national retailer or manufacturer, agrees with a funder to offer its suppliers early payment. When the buyer approves a supplier’s invoice, the supplier can choose to be paid early by the funder, at a small discount. The buyer then pays the funder on the invoice’s due date, which may be extended.

Party	What they get
Supplier	Cash earlier than the normal terms
Buyer	Longer terms, steadier supply base
Funder	A return based on the buyer’s credit

Where small businesses fit

Most small and medium businesses encounter supply chain finance as suppliers to bigger customers. If a large customer invites you into its program, the main questions are: what does early payment cost, is it optional, and how does it compare with other ways to get paid sooner?

If you want to fund your own supplier payments, trade finance is the closer fit. If you want to speed up payment on your own invoices regardless of the customer, look at invoice finance or debtor finance.

Things to watch

• Early-payment discounts add up across many invoices.
• Program terms can change; check notice periods.
• Long payment terms are only bearable if you can access cash when you need it.

Small businesses also have protections against unfair contract terms in standard-form contracts, explained by ASIC. If you’re feeling squeezed by a big customer’s terms, talk to us about your options.

An illustrative example

A meat processor supplies a supermarket group that pays on extended terms. Through the group’s supply chain program, the processor chooses early payment on selected approved invoices during its busiest months. (Illustrative only.)

What else is supply chain finance called?

Lenders, accountants and search engines don’t all use the same words. You’ll also see this entry described as Supplier finance and Reverse factoring. In our A–Z index every one of those names points back to this page, so whichever term you searched, you’ve landed on the same thing. If a lender uses a name you don’t recognise, ask them to describe how the security, the term and the repayments work; that tells you far more than the label.

Where does it sit in the directory?

This entry lives on the trade, stock and asset shelf. It’s most often used for stock, trade and invoices, and the security usually involved is invoices, stock or orders. It usually involves a little more paperwork and assessment than the quickest options, so start early. Its closest neighbours are:

• Trade finance — Pay suppliers now and repay once the goods have sold.
• Import finance — Pay overseas suppliers, freight and duty before the container lands.
• Export finance — Bridge the long wait between shipping overseas and getting paid.
• Purchase order finance — Fund the supplier so you can say yes to an order bigger than your bank balance.

To compare all of them at once, filter the Loan Finder by purpose and security.

Common mistakes to avoid

• Assuming every invoice qualifies. Funders exclude disputed, overdue, related-party and some progress-claim invoices, so check eligibility early.
• Overlooking concentration limits. If one customer makes up most of your sales, the available funding may be lower than expected.
• Not reading the minimum term. Some facilities have notice periods and minimum fees that matter if your needs change.
• Using it to mask thin margins. Trade and receivables funding works best when each transaction is profitable after finance costs.
• Poor record-keeping. Clean, up-to-date ledgers and stock records make approval smoother and limits higher.

What should I ask before signing up for supply chain finance?

A short list of questions saves a lot of regret. Put these to any lender or specialist before you commit:

1. What percentage is advanced? The advance rate on eligible invoices or stock decides how much cash you actually receive.
2. Which items are excluded? Know the eligibility rules for overdue, disputed and concentrated debts or stock.
3. How are fees charged? Discount charges, service fees and minimums can be structured very differently.
4. Is the facility confidential? Decide whether you’re comfortable with customers knowing a funder is involved.
5. What’s the minimum term and notice period? Exit terms matter if your business changes direction.

If an answer is vague, ask again or ask for it in writing. Good lenders are happy to explain their terms clearly.

Find the right way to get paid sooner

Whether you’re offered a supply chain program or need your own solution, a short enquiry is the place to start. No credit check is involved and your details go to one specialist, not a crowd.

Please tell us about your customers, their terms and your monthly invoicing. Accurate details mean useful options. Start your enquiry.