Supplier finance is increasingly popular as a buyer-led financing solution that encourages fast payment of receivables, supporting businesses throughout the value chain. It is also a relatively straightforward process.
We thought we would share our top five tips on what to look out for if you are looking to supplier finance to fund your business and power your growth. Here they are:
- Is it a suitable product?
In this context, we need to consider both partners in the relationship – the supplier and the buyer. For larger businesses and their suppliers, it tends to be more straightforward with established supply chains. For new entrants, smaller companies, and those new to supplier finance, you may need to conduct more detailed due diligence, look to your existing insurance cover, and possibly supplement with other forms of business credit, at least in the short term.
- Buyer due diligence.
Talking of due diligence, anyone looking to supplier finance will need to manage this carefully and in detail. A close eye will need to be cast on everything. Look out for misrepresented invoices and do extensive credit checks.
- Be aware of fraud.
Our advice is clear: look out for inaccurate invoices, fake suppliers and those keen to offer financial inducements. With the growth of online enterprises with no physical offices or clearly defined assets over the past year, this has never been so important. Fraud is a fraud, and plenty of bad faith actors are out there looking to take advantage of lax processes, checks and balances.
- Supplier due diligence.
If you are a supplier, you also need to do due diligence – only this time focusing on the buyer. You need to ask some detailed questions, including whether they are using other supplier financing solutions and how they account for it and how they measure receivables. This is incredibly important as it will give you an idea of the financial health of the buyer. The last thing you as a supplier need is a financing solution kept off-balance sheet, simply because this makes the business look more robust and financially viable than it possibly could be.
- Insight, insight, insight.
The final point we would urge suppliers to consider when entering a relationship is to get a clear insight into the current credit position of the buyer. Given that we have been through the most economically turbulent period in anyone’s lifetime gaining an insight into the financial wellbeing of a buyer will be critical. And with many businesses reliant on government-backed loans and moratoriums on tax and rent, you need to have visibility on all and any financial liabilities.
This is not an extensive list, but it is the right place to start. Supplier finance is an established solution to fund the supply chain. But at the end of the day, any third-party financier will be looking at whether robust financial structures are in place; those invoices are legitimate; the buyers’ businesses are going concerns and that there is insurance to cover any defaults by the buyer.