Supply chain finance: joining a programme or paying suppliers early

In its classic form, supply chain finance is started by the buyer, not the supplier. A large company, often with a strong credit rating, agrees a programme with a bank or platform. Its suppliers are invited to join. When the buyer approves a supplier's invoice for payment, the supplier can choose to be paid straight away by the funder, less a discount. The buyer then pays the full invoice to the funder on the normal due date, or sometimes later.

The price of early payment reflects the buyer's credit risk, not the supplier's. That is the attraction for a small supplier to a big customer: it can receive cash at a cost it could not obtain on its own credit. For the buyer, the programme supports its supply base and often allows it to lengthen payment terms without starving suppliers of cash.

The British Business Bank explains supply chain finance in more general terms if you want an independent overview.

Being invited onto a customer's programme is usually a sign that the customer wants to extend terms, or has already done so. Before joining, work through these points:

• Is it optional? Some buyers present early payment as a choice; others tie it to new, longer standard terms. If you decline, you may simply be paid later.
• What does the discount cost over a year? A small percentage taken off each invoice paid 90 days early can be a meaningful annual cost. Compare it with the price of your own invoice finance or overdraft.
• Which invoices qualify? Only invoices the buyer has approved. Disputed items, credit notes and deductions are taken out first, so the funded amount can be lower than you expect.
• Could the programme be withdrawn? Programmes depend on the funder's appetite for the buyer. If the funder withdraws, you are back on the long terms without the early-payment option. Plan your cash flow as if that could happen.
• Does it conflict with your existing facility? If you already use invoice finance, those receivables may be assigned to your provider. Selling them again to a programme funder breaches that agreement unless your provider agrees to carve the customer out.

Large companies must publish their payment terms, average days to pay and whether they offer supply chain finance under the payment practices reporting rules. You can check when large businesses pay their suppliers on GOV.UK before agreeing terms with a new customer.

Many suppliers, particularly in food, building materials and wholesale, offer a settlement discount for paying within a short window. Where that discount is larger than the cost of the finance used to take it, funding early payment improves your margin. Paying reliably also strengthens your position when you ask for better prices, priority allocation in a shortage, or higher credit limits. The calculation is simple but often skipped: compare the discount, annualised, with the total cost of the facility.

Who qualifies depends on which side you are on. A supplier can only use a classic programme if a customer runs one and invites it to join; eligibility then rests mainly on the buyer's credit, plus the funder's identity checks on your business and confirmation that the receivables are not already assigned elsewhere. Your own size or trading history matters far less. An SME buyer wanting a supplier payment facility is assessed on its own merits instead: usually a UK limited company or LLP with at least a year or two of trading, a regular purchasing pattern, healthy gross margins and directors willing to support the facility. Start-ups, businesses with irregular one-off purchases and those with recent adverse credit find this side harder.

Joining a customer's programme as a supplier is typically quick: onboarding usually takes from a few days to a few weeks, driven by the funder's identity checks, signing the programme terms and, if you already use invoice finance, agreeing a carve-out with your provider. After that, early payment is available as each invoice is approved by the buyer, so the buyer's own approval cycle sets the pace. For an SME buyer, a supplier payment or trade finance facility typically takes two to four weeks to put in place, longer where imports, overseas suppliers or an existing lender's debenture need deeds of priority. Having aged creditor and debtor lists and management accounts ready shortens the process.

A supplier on a buyer-led programme normally gives no security at all: it sells approved invoices to the funder, which relies on the buyer to pay on the due date. Check the programme terms, though, as some include recourse for disputes, credit notes or warranty breaches. An SME buyer's supplier payment facility is different, because the funder is relying on your business to repay. Lenders usually take a debenture with fixed and floating charges, often ask for a personal guarantee from the directors, and may take title to the goods or a charge over stock until each drawing is repaid. Where a bank or invoice finance provider already holds a debenture, a deed of priority is usually needed. Our guide to debentures and charges explains the detail.

Supplier finance can hide the true level of a business's borrowing. Amounts owed to a funder may sit in trade creditors rather than in bank debt, which flatters the balance sheet until the funder steps back. Keep a clear record of what you owe to whom, and when.

For a supplier, the risk is dependence: once your cash flow relies on a customer's programme, you have little leverage if the customer changes the terms. For a buyer, stretching supplier payments too far damages relationships and can breach commitments such as the Prompt Payment Code if you are a signatory. And sometimes the cheaper answer is to negotiate: longer terms with a supplier you pay reliably cost nothing.

If no programme is on offer, or its cost is too high, suppliers waiting on a large customer usually have better-known options.

• Selective invoice finance to fund chosen invoices to that customer without committing your whole ledger.
• High concentration invoice finance where one customer makes up most of your sales, which many standard facilities restrict.
• Confidential invoice finance if you want funding against your debtors without the customer knowing.
• A working capital loan to bridge longer payment terms while you renegotiate them.