Also known as vendor financing or supplier credit, supplier financing is a situation in which goods or services are delivered to a buyer using payment terms that are deferred. Financing solutions of this type are often used when exporting goods to buyers based in countries other than where the supplier is located. In most cases, the extension of this type of financing is insured by an export credit agency that is reasonably sure of the ability of the buyer to honor the terms of the purchase agreement.
There are a number of benefits to supplier financing. For the buyer, the opportunity to receive goods and services now and pay later means there is time to resell those products before the payment is due. This means that it is possible to receive the products, sell them to clients, and pay for the goods out of the revenue generated by those sales. As a result, the buyer has no real out of pocket expenses connected with the purchase, and does not tie up his or her other financial resources in the interim.
Sellers also can benefit from the use of supplier financing. By extending this form of credit to buyers, the supplier can move larger quantities of product within a shorter period of time. Since the transaction is insured, the seller knows that the payment will be rendered within a given period of time. This makes it much easier to project income levels and arrange finances to ensure that the business continues to operate, and that the business is likely to show a profit over a specific period of time.
While supplier financing is usually associated with the exporting of goods and services, the same concept is often used in many domestic settings. Suppliers of everything from office machinery and supplies to raw materials may choose to extend vendor credit to approved customers. The amount of credit extended is usually based on the overall credit rating of the client. In situations where the client demonstrates consistent responsible use of the supplier financing, there is always the possibility of being granted an increase in the line of supplier credit, which further encourages customer loyalty and ultimately benefits the operation of the supplier.
It is important to note that supplier financing can be revoked at the discretion of the supplier. This is likely to occur when a customer consistently fails to comply with the terms and conditions associated with the extension of credit, or when the circumstances of the buyer changes so significantly that the supplier considers the degree of risk associated with the credit to be too high. Typically, suppliers notify buyers in advance when there is a change in the supplier financing arrangement, allowing the buyer to make other arrangements for paying any current balance as well as seeking other ways to make purchases in the future.