Payable Financing:

What Is Payable Financing?

Fundamentally, payable financing is a buyer-led supply chain financing programme. With the help of this technique, vendors of a corporate or organisation can raise funds through unpaid invoices/accounts receivables.

It enables businesses to provide funds to their suppliers by offering discounts on receivables before the due date. This financing option is also referred to as – trade credit, vendor financing and supplier finance, among others.

Parties Involved In Payable Financing:

There are 3 distinct parties involved in a payable financing arrangement, namely – 

1. Buyer (serves as an anchor-party)
2. Supplier 
3. Finance provider

How Does Payable Finance Work?

Generally, when a business receives products/services, they have around 30-90 days to pay their vendors or suppliers. Businesses who are vendors to large corporations can avail the option to raise funds via payable financing. 

Under this financing programme, suppliers sell their accounts receivables and get an early but discounted payout from a finance provider. The creditworthiness of buyers plays an essential role in this financing option as financiers factor in the same to provide funds without recourse to the supplier (seller).

As per this arrangement, the buyer (business/corporate) pays the outstanding principal amount to the financier on maturity. Typically, payable finance services are availed by large corporate, medium-sized buyers and non-investment-grade buyers. 

Features Of Payable Financing:

The most noteworthy features include –

• Risk - This financing option is subject to several risks including – default on buyer’s part, seller’s dilution, operational risk and risk of double financing, among others. Nonetheless, leading financiers are adept at mitigating such risks quickly.

• Asset Allocation - Distribution of assets is achieved through – securitisation of trade receivables, syndications, funded and unfunded risk partaking or via credit insurance policies. 

• Documentation - Concerned parties, i.e. finance providers and buyers, enter into a service agreement. It states that the buyer has agreed to pay the outstanding accounts payable and invoices. Also, the seller and financier enter into Receivables Purchase Agreement as per which the seller extends an assignment right to the financier.

• Payout Option - Businesses have the option to pay the dues in instalments and carry out the same from a portion of the firm’s earnings. 

Benefits Of Payable Financing:

The payable financing option is a discreet funding option. By ensuring on-time payouts, it helps to optimise operational activities of both buyer and supplier.

These are the significant benefits of payable financing –

• For Buyers

• It extends flexibility on payout and commercial terms.
• It promotes optimisation of liquidity.
• Improves the quality of operational activities. 
• Stabilises the supply chain to a great extent.
• The funding option facilitates easy procurement of products, ensures the efficient and sustainable management of resources.

• For Suppliers

• It improves their cash flow flexibility and estimation.
• Enables suppliers to optimise their working capital.
• Serves as an alternative to business loans.
• Proves useful in sustaining a long-period of non-payment.
• Facilitates early collection through the discounting method.

Nonetheless, the funding option has its limitations too. It proves challenging for start-ups to obtain this financing option and requires the concerned parties to go through a lengthy documentation process.

Difference Between Payable Financing And Invoice Financing:

As an alternative for maintaining working capital, suppliers may choose invoice discounting services from KredX and shorten the working capital cycle successfully. Such funding options help businesses raise funds within 24 to 72 hours* at attractive terms of service and simple requirements.