What Is Supplier Financing? Insights for Product-Based Businesses

When the demand for your products increases, it can be a double-edged sword for your business. On the one hand, it’s a sign of success, but on the other hand, sudden spikes in customer demand can strain your resources. 

Whether you’re a startup or a seasoned enterprise, keeping up with demand while managing cash flow can be challenging. Traditional loans may not always be accessible due to factors like limited credit history or insufficient collateral.

This is where supplier financing comes in. This strategic solution is your ticket to improving cash flow and maintaining optimal relationships with suppliers. 

Let’s explore what supplier financing is, what it’s not, how it works, its benefits, its drawbacks, and more.

Understanding supplier financing

Supplier financing is a financial arrangement where a business (buyer) partners with a financial institution (funder) that will pay their suppliers on the buyer’s behalf. After purchasing goods or services, the supplier can request early payment and the funder will provide payment quickly with a small fee deducted. The buyer then repays the funder on a predetermined future date.

The key benefit of supplier financing programs, also called reverse factoring, is that suppliers can receive payment within days while buyers may receive longer payment terms than what the supplier offers. This can strengthen both parties’ financial positions by boosting cash flow and working capital. Companies may use this option as needed, such as during slow seasons if demand fluctuates seasonally. 

The differences between supplier financing and other financing options

Of course, supplier financing is not the only inventory funding option. Some alternatives may offer faster access to capital and more competitive rates. However, they come at a cost. 

Here are some popular choices for inventory funding:

• Small Business Administration (SBA) loans offer long-term funding and partial coverage for inventory costs, but they may require collateral and have immediate repayment expectations. 
• Traditional loans or lines of credit cover between 25% and 80% of inventory costs, but they may require outflows to cover the remaining inventory cost and payments before inventory generates revenue.
• Finance companies specializing in serving SMB CPGs offer fixed Annual Percentage Rates (APRs) and monthly payment structures, making them predictable, but they impose qualification criteria based on company revenue.

These financing options can be fitting for entrepreneurs and founders who don’t mind paying installments immediately or via daily debit. However, for businesses looking to close the distance between immediate supplier payment and sales turnover, going for a supplier financing program is a more suitable route.

How supplier financing works: A simple 5-step process

The supplier financing process typically involves these key steps:

1. The buyer begins the process by submitting a purchase order to the supplier for the needed goods or services. This order details the items, quantities, pricing, delivery date and other key terms.
2. Upon receiving the purchase order, the supplier delivers the items or completes the services as specified. They also generate an invoice reflecting the final amounts owed by the buyer according to the purchase order.
3. The buyer’s accounts payable team reviews the supplier’s invoice for accuracy against the original purchase order. If approved, the invoice is forwarded to the third-party funder for payment processing.
4. The financial institution will deduct a small fee and deposit the remaining invoice balance directly into the supplier’s account.
5. On the agreed-upon payment date listed on the invoice, the buyer pays the full outstanding amount directly to the financier rather than the original supplier. This completes the transaction.

The benefits of supplier financing

Supplier financing offers a range of benefits to both buyers and suppliers, including the following:

Improved cash flow

Supplier financing can improve a company’s cash flow by freeing up capital otherwise tied up in stock. This gives businesses more flexibility to reinvest in areas like marketing, expansion, or innovation. For example, a retailer can purchase a larger quantity of seasonal items upfront using inventory funding, ensuring sufficient inventory without draining cash reserves.

Increased sales

With the ability to maintain optimal inventory levels through funding, businesses can avoid stockouts and fulfill customer orders promptly. This leads to higher customer satisfaction and increased sales. For instance, an e-commerce company that secures inventory funding can ensure they have popular items in stock consistently, leading to repeat purchases and positive word-of-mouth referrals.

Risk mitigation

By having the right amount of inventory on hand through supplier financing, businesses can mitigate the risks associated with stock shortages or overstocking. This helps in maintaining a balanced inventory level and reducing the chances of dead stock. For instance, a food distributor can use supplier inventory financing to manage seasonal fluctuations in demand, ensuring they have enough fresh produce without incurring losses from excess inventory.

How Kickfurther can help

With Kickfurther, you get up to 100% funding for your inventory costs. We offer flexible repayment plans that allow you to get your inventory now and pay later when you start selling.

Kikfurther is your trusted funding partner that puts you in charge of your company and enables you to achieve growth by funding your inventory through consignment. You get the funding you need without giving up equity to other investors.

Choosing Kickfurther comes with advantages such as:

• No immediate repayments – Unlike other providers who may request repayment through daily debit, Kikfurther’s repayment schedule accounts for your sales cycle. You decide when your cash flow can support payments. 
• Non-dilutive – No equity required! You can access inventory funding without putting your assets’ ownership at risk.
• Not a debt – Since inventory financing is not a loan, it’s not registered as debt in your books. This ensures you’re not lowering your VC valuation.
• Immediate access to capital – Kickfurther helps you pay your supplier invoices when they’re due every time, regardless of your cash flow situation. We’re here to fund your inventory order(s) each time you need us to.

Oftentimes, inventory is the costliest expense for businesses, and funding it with cash may hinder growth at scale. Kickfurther helps you free up existing capital to invest in business development. Get a trusted supplier financing partner—join Kickfurther and get funded today!