Supplier financing may be one way to get access to cash quickly and it may be easier than traditional financing methods.
Supplier Financing Defined
Also known as supplier credit, this type of financing occurs when you make a purchase from one of your suppliers or vendors on credit. You place an order for raw materials or finished goods, and the supplier ships it to you, along with an invoice. From the time you receive the goods until you pay the invoice, the supplier is, in essence, giving you a short-term loan.
Cash flow is one of the most important financial considerations for any business. Supplier financing can help with cash flow because it may allow you enough time to sell the products you receive from your supplier before having to pay for them.
Who Can Get Supplier Credit?
Suppliers may be willing to take into account your past history with them, as well as your plans for future growth. A supplier may be willing to extend your terms in hopes you will continue on as a long-term customer.
Some steps to find out who may be willing to work with you are below.
- Begin by making a record of your past purchases for each supplier you want to approach. When you speak to suppliers, you’ll be able to put a “value” on your future business.
- Inform suppliers of your plans for your business, and provide realistic projections so they understand how you plan to pay for your supplies.
- Let them know you are talking to all of your suppliers and asking for the best terms they can give you.
How to Negotiate for Terms
Two areas you’ll want to negotiate for when talking to your suppliers are outlined below.
- Payment terms: This is the amount of time you’ll have to make the payment from the receipt of the invoice. Common terms are net 10, net 30, and net 45. That means you’ll have 10, 30 or 45 days to make your payment after the date of the invoice.
- Discount for early payment. A discount rate for early payment can work this way: your invoice may say 3/15 net 45. That means that you have 45 days to pay the invoice, but if you pay it within 15 days, you’ll get a 3 percent discount. You can decide between the extra savings and keeping your cash on hand for 30 more days.
How Much Can You Save Using Discounts for Early Payments?
Discounts vary widely and are negotiable. For instance, let’s imagine you owe a supplier $1,000. If you take the early pay discount mentioned above, you can only pay $970 on that invoice, increasing your profit by $30. If you instead decide to use the cash for another 15 days, you’ll pay $30 for those extra days. If you have invoices for the same amount once a month, you’ll save $360 a year by paying early.
In a small business, supplier credit can be a relatively easy and beneficial, possibility for financing.