Supply chain finance for UK companies: pay suppliers, fund orders

Supply chain finance puts a lender between a buyer and its suppliers, so the supplier can be paid sooner while the buyer pays later. How it is set up, and who can start it, depends on which form you use.

In the classic form, known as reverse factoring or payables finance, the process usually looks like this:

1. A large buyer sets up a programme with a bank or finance provider and invites its suppliers to join.
2. The supplier delivers and invoices the buyer as normal.
3. The buyer approves the invoice on the programme's platform, confirming it will pay in full on the due date.
4. The supplier can choose early payment, receiving the invoice value minus a discount charge.
5. The buyer pays the lender on the original or an extended due date.

The pricing is based mainly on the buyer's credit strength, not the supplier's. That is why reverse factoring is typically run by large, well-rated companies: a lender will only fund thousands of supplier invoices cheaply if it trusts the buyer to pay.

This is the honest point many pages skip. A mid-sized company usually cannot launch its own reverse factoring programme. What it can do is use finance that achieves a similar result from its own side of the supply chain.

Most mid-sized UK companies use three practical forms of supply chain finance: supplier or trade finance, purchase order finance and invoice finance. Each funds a different stage of the trading cycle, and they often work together.

Supplier or trade finance: paying your suppliers now, repaying later

With supplier finance, a lender pays your supplier, in the UK or overseas, and your company repays over an agreed period, often 30–180 days per transaction. You get the effect of longer payment terms without asking your supplier to wait. Our trade finance page explains how this works for imports, exports and letters of credit.

Purchase order finance: funding a confirmed order

Purchase order finance pays the supplier costs of a specific, confirmed order from a creditworthy customer. The lender relies heavily on that customer and on the deal itself, so it can help a company take on an order that would otherwise be too large for its cash.

Invoice finance: releasing cash once goods are delivered

After delivery, your invoice can be funded through invoice finance. Many lenders repay the earlier supplier or purchase order funding from that invoice advance, so the full cycle from supplier to customer is covered.

If you are invited to join a buyer's programme

If a large customer invites your company to join its reverse factoring programme, that is a separate arrangement between you and the buyer's provider. It can be a useful option, but read the terms carefully and check whether joining is optional, how the discount is calculated and whether it affects your other facilities.

Supply chain finance is usually priced per transaction: a charge based on how much is funded and for how long, plus fees. The total depends on the risk the lender takes and how much work each deal involves.

• Funding or discount charge: usually a percentage of the amount drawn, calculated for each period it is outstanding.
• Arrangement or facility fee: charged when the facility is set up or renewed.
• Transaction fees: some lenders charge per supplier payment or per letter of credit.
• Due diligence and legal costs: checks on suppliers, goods and contracts, and the cost of security documents.
• Currency and shipping costs: for imports, foreign exchange, freight, insurance and duty sit on top of the finance cost.
• Non-utilisation or minimum fees: some facilities charge if you use less than an agreed amount.

Lenders usually price higher where the goods are hard to resell, the supplier is new or overseas, the customer is less established, or the margin is thin. Purchase order finance often costs more than supplier finance because the lender is funding before any goods exist.

The useful test is total cost against margin. If the finance costs more than the profit on the deal, it does not make sense, however quickly it can be arranged.

Illustrative example only: actual costs depend on the lender and your circumstances.

Imagine a wholesale company wins a confirmed order worth £100,000. Its supplier wants £60,000 before it will ship the goods. A lender pays the supplier £60,000, and the deal takes 60 days from supplier payment to customer payment.

• Funding charge of 2.5% per 30 days on £60,000: £1,500 per 30 days, so £3,000 over 60 days
• Arrangement fee: £500
• Total finance cost: £3,500
• Gross profit before finance: £100,000 minus £60,000, which is £40,000
• Gross profit after finance: £40,000 minus £3,500, which is £36,500

In this example the company keeps most of the margin on an order it could not otherwise have taken. If the order had been delayed by another 30 days, the funding charge would rise by £1,500, so build in realistic timings.

Through our panel, supply chain finance facilities typically start from around £25,000 and can reach £1,000,000 or more for larger, established companies. The amount is sized on your transactions, not just your accounts.

Lenders usually look at:

• The value and frequency of your supplier purchases
• Your gross margin on the goods being funded
• The track record and location of your suppliers
• The credit strength of your customers, especially for purchase order finance
• Your company's accounts, existing borrowing and repayment history

Many lenders fund a percentage of the supplier cost rather than the full amount, so your company may need to contribute a deposit. Our guide on how much your company can borrow explains how lenders think about overall borrowing capacity.

Supply chain finance is tied to real goods and real deals, so the main risks come from things going wrong in the supply chain itself. Check these points before you commit.

• Personal guarantees: directors are often asked to guarantee the facility. Check whether it is capped. Our guide to personal guarantees explains what you are agreeing to.
• Security: many lenders take a debenture or rights over the goods and related invoices.
• Delays and disputes: if goods arrive late, are faulty or the customer pays late, charges keep building and you may need to repay from other funds.
• Recourse: most facilities are with recourse, so your company remains liable if a customer does not pay.
• Minimum terms and notice periods: ongoing facilities may have a minimum term, notice period or exit fees.
• Interaction with other finance: check that the lender's security does not conflict with any existing lender.

Supply chain finance suits companies that need to pay for goods before they are paid by customers. Other options may fit better depending on what you are funding.

• Trade finance is the closest match for imports, exports and letters of credit, and is often the same thing under a different name.
• Stock finance suits companies that need to hold inventory for longer, rather than fund specific transactions.
• Invoice finance is better if your cash gap starts after delivery, while you wait for customers to pay.

Many companies combine two of these, for example supplier finance to buy goods and invoice finance once they are sold.

Sometimes, depending on the lender. Because supply chain finance is linked to specific transactions, some lenders focus more on the deal, the supplier and the customer than on your company's past results.

That said, lenders still check your company's credit history and that of its directors. Adverse credit, such as county court judgments or missed payments, can make approval harder and terms more costly. Lenders set their own minimum trading periods, which range from a few months to two or three years, and many want to see a track record of similar deals. Low profits may be acceptable if margins on the funded goods are healthy, but lenders will want to see that the business can absorb delays.

Supply chain finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated business lending. The protections of the Consumer Credit Act generally do not apply.

That makes the agreement itself your main protection. Read it in full, ask about anything unclear and consider independent legal or accountancy advice. Welcome Finance is not authorised or regulated by the FCA and arranges unregulated business finance only. Our guide on regulated vs unregulated business finance explains the difference.

We help you work out which form of supply chain finance fits your trading cycle, then introduce you to suitable lenders on our panel. Every client has a dedicated relationship manager, a real person you can reach by phone, email and chat, from your first enquiry until the lender pays out.

1. Check eligibility: we check eligibility in about 60 seconds without affecting your credit score.
2. Understand your supply chain: your relationship manager looks at your suppliers, customers, margins and timings.
3. Match to lenders: we introduce you to lenders on our panel whose criteria fit your deals.
4. Apply: the lender runs its own credit checks and due diligence once you decide to apply.
5. Review and complete: we help you compare offers and understand the terms before you sign.

We do not charge you a fee. We are paid a commission by the lender when your finance completes, and you can ask how much we will receive. Commission can differ between lenders.

Is supply chain finance the same as trade finance?

They overlap. Trade finance usually describes funding for specific purchases, especially imports and exports. Supply chain finance is a wider term that also covers reverse factoring programmes run by large buyers.

Will my suppliers know I am using finance?

Usually, yes. The lender often pays the supplier directly, so the supplier will see the payment coming from a finance provider.

Can services businesses use supply chain finance?

It is mainly designed for physical goods. Services businesses often find invoice finance or working capital loans more suitable.

Does the lender pay overseas suppliers?

Many lenders can pay suppliers abroad, often in their own currency. Foreign exchange costs and the time goods spend in transit affect the total cost.

What happens if my customer cancels the order?

Your company usually remains liable to repay the lender. Check what the agreement says and whether the goods could be sold elsewhere.

Is a buyer's reverse factoring programme better than my own facility?

It can be cheaper because it is priced on the buyer's credit, but it only covers that buyer's invoices. Your own facility can cover a wider range of deals.

Can supply chain finance sit alongside a bank overdraft or loan?

Often, yes, but the new lender may need your existing lender's agreement over security. Your relationship manager can help you check this early.