Supply chain finance: getting paid early by a big customer's funder

Picture a regional manufacturer supplying a national retailer. The order book looks wonderful, but the retailer pays on 60 or 90 days, and wages fall due every Thursday. Then a letter arrives inviting the manufacturer to join the retailer’s “early payment program”. That letter is supply chain finance, and whether it’s a gift or a trap depends almost entirely on the terms sitting underneath it.

How does supply chain finance actually work?

Supply chain finance flips the usual direction of invoice funding. Instead of the small supplier going out to find a financier, the large buyer brings one in and offers access to its whole supplier base.

The sequence normally runs like this:

1. You deliver and invoice the buyer as usual.
2. The buyer approves the invoice in its system, confirming the goods or services were accepted and the amount is owed.
3. The approved invoice appears on a platform run by the funder (often a bank, sometimes a fintech).
4. You choose whether to take early payment. If you do, the funder pays you the face value less a discount.
5. On the original due date, the buyer pays the funder the full amount. You’re out of the picture by then.

The crucial detail is step two. Because the buyer has confirmed it will pay, the funder is really lending against the buyer’s promise. A $20 million supplier dealing with an ASX-listed customer can, in effect, borrow on that customer’s credit standing. That’s why it’s sometimes called reverse factoring or payables finance.

Why did the small business ombudsman look so hard at it?

In 2020 the federal small business ombudsman (ASBFEO) published a review of supply chain finance. Its conclusion was nuanced. The product itself was described as a legitimate way to unlock cash. The problem was how some large companies used it: stretching their standard payment terms out to 90 days or more, then offering suppliers faster payment through a funder in exchange for a discount.

When that happens, the supplier ends up paying to receive money on roughly the timetable it would have expected anyway. The review recommended a maximum 30-day payment term for suppliers under the $10 million turnover mark and better transparency.

The practical lesson for owners: judge the program on the terms beneath it. Early payment on a fair 30-day invoice is a convenience. Early payment on a 120-day invoice you used to be paid on in 30 is a price cut wearing a finance badge.

Check your customer’s payment record before you sign

Here’s something most suppliers never use. Under the Payment Times Reporting Scheme, any business whose consolidated revenue hits the $100 million threshold has to disclose how quickly it settles invoices from small suppliers. They lodge two reports a year, each due three months after the six-month period closes, and the results are published on the public Payment Times Reporting Register.

Before you accept a new customer’s terms or join its early payment program, search the register for that company. You’ll see how long it says it takes to pay small suppliers and what share of invoices it pays within 30 days. If the reported numbers look slow, you have a factual basis for negotiating shorter terms first, and only using supply chain finance as a backstop.

What does supply chain finance cost?

The cost comes out of your invoice as a discount. It’s calculated on the face value and the number of days between the funder paying you and the buyer’s due date. Draw the money on day five and you give up more; draw it a week out from the due date and the haircut shrinks.

As a directory, we don’t publish rates. The useful number is the dollar amount the discount removes, compared with what the money is worth to you.

An illustrative example. A Brisbane packaging supplier issues a $90,000 invoice on 75-day terms. The buyer approves it on day 8, and the platform offers payment on day 10 for $88,650, so the discount is $1,350 for receiving the money 65 days early. The owner compares that with two alternatives: dipping into an overdraft that’s already near its limit, or delaying a supplier and losing a prompt payment discount worth about $1,100. In this case the early payment wins. On a 30-day invoice with the same discount, it probably wouldn’t.

To model your own invoices, our invoice finance calculator and cash flow gap calculator help put the gap and the cost side by side.

If a big customer’s terms are squeezing your cash right now, tell us about the gap. The form is a sixty-second job, and a query like that leaves your credit report alone.

Supply chain finance vs the alternatives

Option	Who arranges it	Priced on	Covers	Best when
Supply chain finance	Your buyer	The buyer’s credit	Only that buyer’s approved invoices	One large customer dominates your book and offers a fair program
Invoice finance	You	Your debtors and history	Most of your receivables	You have many trade customers on terms
Trade finance	You	Your business and the deal	Paying your own suppliers	The squeeze is upfront stock or imports
Business line of credit	You	Your business	Any business purpose	Gaps are irregular and you want flexibility

Our supply chain finance vs trade finance comparison goes deeper on the two most commonly confused options. In short, supply chain finance helps the seller get paid sooner; trade finance helps the buyer pay sooner.

What a funder checks (and what it doesn’t)

Because the buyer’s approval does the heavy lifting, onboarding for suppliers is usually light compared with a loan:

• Your identity and business details: ABN, company or trust details, directors, bank account.
• Your relationship with the buyer: that you’re an approved supplier and the invoices are genuine.
• Assignment terms: you’ll sign an agreement transferring approved invoices to the funder when you take early payment.
• Existing security: if your bank or another financier has a GSA covering your receivables, it may need to consent. Check before you sign, because selling invoices it has security over can breach your existing facility.

What funders generally don’t need from a supplier: property security, full financial statements or a strong personal credit history. That’s the main attraction for smaller suppliers.

Pros and cons for suppliers

In its favour

• Cheaper than most supplier-arranged funding because the buyer’s credit sets the price
• Optional on each invoice, so you only use it when cash is tight
• No new loan on your balance sheet in most cases
• Fast once the invoice is approved

Against it

• Only works with one customer, so it doesn’t fix a broad receivables problem
• Can normalise long payment terms you’d otherwise negotiate down
• Disputed or unapproved invoices aren’t eligible, which is often when you need cash most
• If the buyer winds the program back, your cash flow can change overnight

Where to go if your gap is bigger than one customer

Supply chain finance is a narrow tool. When several customers pay slowly, or the squeeze comes from paying your own suppliers, look at debtor finance, working capital loans or a facility secured by property. Invoice and trade specialists in our directory, such as Octet and Earlypay, work in this space, and our guide to paying suppliers compares the options by purpose.

Fund the gap your customers leave behind

Waiting on big customers is one of the most common reasons sound businesses run short, and it’s a problem we’re comfortable helping with, whether or not your customer offers an early payment program.

Filling in our form is roughly a one-minute task, and no credit enquiry gets lodged against you for doing it. We keep your enquiry in-house instead of auctioning it to a panel, so there’s no flood of calls from funders you’ve never heard of. One of our team works through your customer list, terms and timing personally, then picks up the phone. Give us accurate debtor names, invoice values and payment days: precise inputs let us point you at a workable facility on the first call rather than the third.

Talk to us about your customer payment gap →