As any small business owner knows, your business cashflow is connected with that of the businesses around it. Your financial position at any given time is influenced by the cashflow through your network of suppliers and customers. And the same is true in reverse.

It’s possible, therefore, for the supply chain to be a source of financial strength for a small business: there are lending options available that allow you to make use of the purchasing power or credit strength of other parts of your supply chain. The upshot is you may be able to borrow funds at a lower lending rate or have access to funding that wouldn’t be possible on your own.

This is part of a short blog series on alternative finance options for different business needs, written with advice from Henry Audley-Charles of

What kind of finance do you need?

This post will cover alternative funding solutions ideal for:

  • a small business as a supplier to another, financially stronger, business
  • OR a small business with fluctuating sales income that still needs to make regular payments to suppliers
  • looking for short term solution to ease day to day cashflow, rather than a lump sum payment.

If this isn’t you we’ll be blogging about finance options more suited to other situations in the rest of this blog series, see the end of the post for details.

As a supplier to another business – Supplier finance

If your business is a supplier to a much larger business, your customer may have an in-house supplier finance scheme. In the case of supplying to a large supermarket chain, for example, the payment terms will usually be dictated by the supermarket chain. Payment terms can be up to 120 days, which is a long time for a small business to wait for the cash.

With a supplier finance scheme a third party funder will pay your invoice (as the supplier) as soon as the customer approves it. This accelerates your cashflow, allowing you to be paid almost immediately rather than 120 days. The customer then pays the invoice according to their payment terms.

You, as the supplier usually pay the lending charges, so why does this make sense for you? The credit limit and lending charges are determined by the buyer’s balance sheet and credit rating, meaning cheaper access to finance than a supplier can secure on their own.

This works well where the buyer has a healthy balance sheet and a stronger credit rating than the supplier, meaning that all parties to the agreement benefit. Less cash is tied up in the supply chain and more is available to both buyer and supplier on a day to day basis.

As a buyer from another business – Supply Chain Finance

As a buyer in the supply chain you may have fluctuating sales income, yet still need to make regular payments to suppliers. Buyers may often benefit from prompt-payment discounts, but if your income is unpredictable and you cannot always guarantee prompt payment, this leaves you at a disadvantage.

Supply chain finance is different to supplier finance, as it does not involve an in house scheme. As the buyer, you can approach a specialist lender who will look at your balance sheet and determine what terms they can offer.

Lenders may offer funds with up to 120 days credit for the date of an invoice, which you then use to pay your supplier invoices. This is a good option to give you the buying power for the materials you need to meet an unusually large order, for example. You will  need to demonstrate a healthy balance sheet for your business to access this finance.

As with any finance agreement, make sure you check the terms and conditions and be sure you know what you are signing up for.

Get the right finance

Supplier finance and supply chain finance are very much about either your businesses financial history and financial forecasts or the financial position of your customers.

Any of these agreements will only operate well if they are arranged in such a way to benefit all parties, and to ensure this requires small business funding expertise. We strongly advise you speak to an experienced and ethical broker who can help you choose finance that will not only support your business in the short term, but also strengthen it over the longer term.

Do make sure you fully understand the risks of any funding options you are considering. An ethical broker will take into account your specific business situation and needs and make recommendations that protect your interests.

We’d like to thank both Henry Audley-Charles, Director of and Richard Reuss, Director of Mortgage Plus who we know through our monthly ICB branch meetings, for sharing their time and knowledge for this blog post.

We’ll also be writing about other alternative funding options, suitable for different business situations, over the next couple of months or so.

Blog posts in this series:

Featured image by Ahsan Avi on Unsplash