Accounts payable financing is a solution for companies seeking to extend the terms on their supplier invoices. Notably, accounts payable financing is otherwise referred to as vendor financing or trade credit. This flexible financing solution helps companies by providing additional working capital without racking up more debt and encumbering company assets.
As opposed to using internal cash flow to fund operations, accounts payable companies provide credit to a company to temporarily fund accounts payable whether it be for the purchase of goods or any other related manufacturing costs. Based on a company's creditworthiness, the accounts payable solution company pays the full transaction balance and in return is paid back within a pre-established time period of anywhere between 30-120 days. This solution enables business owners to minimize any gaps in their supply chain cycle, and ideally pay their COGS upon receipt of funds from their customers.
The key to success in vendor financing is in the relationship between the vendor and the borrower. Accounts payable lenders allow businesses to operate at their standard procedure pace and move forward with the purchases of goods and services without having to engage banks and offer personal resources as a means of collateral. Accounts payable solutions eliminate the risk that is often associated and accounted for when taking out a loan and working with a traditional bank.
Trade credit helps businesses establish a balance in their revenue stream that ultimately can retroactively cover operational expenses on the back end. Take Walmart, for example. Walmart is a retail giant that more often than not uses trade credit instead of traditional finance services such as bank funding. Due to the company's size and day to day operations, Walmart utilizes the accounts payable platform to cover inventory costs and simultaneously continue to scale.
Many small to midsize companies are turned off by the concept of debt, small or large. The fact is, accounts payable financing presents a very low risk, high reward ratio. In actuality, 60% of small businesses utilize accounts payable financing to avoid challenging alternatives such as taking out bank loans. Without an immediate exchange of money, vendor financing allows borrowers room to breathe between the time they are wired funds due from their customer and the time in which they are scheduled to reimburse the accounts payable lender.
Imagine a retail company approaching their seasonal line launch date. To create that line the retailer needs proper inventory to execute, such as the selected fabrics and materials. Further, they need these supplies but cannot fund the manufacturing and inventory costs based on internal cash flow.
In this case, accounts payable financing would be a feasible, appealing remedy to maintain operations and meet the company’s launch date. In the evolving financial solution landscape, accounts payable funding can be a rewarding opportunity to promote short-term growth and foster promising business relationships with higher value. This particular form of financing is optimal for growing businesses by delivering the benefits of short-term accounts payable financing as part of their long-term business development strategy.