Payable financing is one of the credit options that is directed towards businesses and helps
them raise funds as and when required. Like any other funding option, payable finance
accompanies a set of features and benefits, which allow enterprises to gauge its usefulness
and limitations better.
The increasing popularity of fintech platforms has opened up a vast array of opportunities
for businesses, especially the MSME sector. Invoice financing is one such
option that helps a business maintain its cash flow requirements.
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,
- Buyer (serves as an anchor-party)
- 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
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
- 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 –
- 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.
- 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
Difference Between Payable Financing And Invoice Financing
Accounts payable is a crucial component as funds are raised against it.
It helps to pay accounts payable early at a discounted rate.
It helps businesses to receive advance payment against their accounts
The financier is responsible for collecting outstanding accounts payable.
Businesses are responsible for collecting outstanding invoices.
Buyer, supplier and financier
There is not such confidentiality as both the buyer and seller are a part of
It is usually confidential, as the corporate is seldom aware of the
Payables Finance for Increasing Financial Flexibility
Payables financing is a strategy that businesses can use to maximize financial flexibility.
It involves optimizing the management of accounts payable, which are the amounts owed to
suppliers for goods and services received. By effectively managing payables, businesses can
improve their cash flow and enhance their overall financial position.
Here are some key ways to maximize financial flexibility with payables financing -
1) Negotiating favorable terms
When establishing contracts with suppliers, businesses should aim to negotiate favorable
payment terms. This may include longer payment periods, discounts for early payments, or
flexible installment plans. By securing more favorable terms, businesses can improve their
cash flow and maintain better control over their financial resources.
2) Implementing automation and digitization
Leveraging technology solutions for accounts payable processes can streamline operations and
reduce manual errors. Automation can help in accelerating invoice processing, improving
accuracy, and enhancing overall efficiency. Digitization also enables better visibility and
tracking of payables, allowing businesses to make more informed financial decisions.
3) Utilizing supply chain financing
Supply chain financing programs enable businesses to optimize their cash flow by leveraging
their position within the supply chain. This type of financing allows businesses to extend
their payment terms with suppliers while providing the suppliers with early payment options.
By stretching out payment terms, businesses can free up working capital and enhance
4) Exploring invoice financing
Invoice financing, also known as accounts receivable financing, involves selling unpaid
invoices to a third-party financier at a discounted rate. This provides immediate cash flow
for the business, enabling them to access funds that would otherwise be tied up in
receivables. By converting accounts receivable into cash, businesses can enhance their
financial flexibility and fund their operations more effectively.
5) Monitoring cash flow and working capital
It's essential for businesses to closely monitor their cash flow and working capital
positions. Regularly analyzing payables, receivables, and inventory
levels can help identify areas where improvements can be made. By actively managing
working capital and optimizing the cash conversion cycle, businesses can maximize their
financial flexibility and improve overall financial health.
6) Building strong supplier relationships
Maintaining strong relationships with suppliers is crucial for successful payables financing.
Open and transparent communication can facilitate negotiations for favorable payment terms
and early payment discounts. Building trust and reliability with suppliers can also lead to
more flexible arrangements, such as supplier financing options or extended payment periods.