Tweet

Working Capital Strategy # 101 – Supplier Financing

Guest post by: Stan Prokop

Article Overview: The article provides insight into the use of supplier financing as an alternative, low cost, working capital strategy for business owners.

Working Capital Strategy # 101 – Supplier Financing

Business owners and financial managers know that their business can be financed in several ways. Perhaps intuitive, but not 100% obvious is the fact that one of the best and cheapest forms of financing is from your suppliers.

Businesses can also continually monitor this type of financing via a specific calculation. That calculation is as follows:

Accounts payable / total assets x100

Multiplying by 100 in our example gives us a percentage that we can more readily understand.

As mentioned, businesses tend to focus on long term debt of issuing equity in their firm when they think of their working capital needs. The reality is that suppliers can provide a healthy component of a company's overall financing needs. The danger of course is that this is done in a positive manner, and that it does not hurt relationships with a supplier, which is key to any firm. We want to be at the top of our suppliers, list, not at the bottom with the reputation of being a chronic slow payer.

So how does this working capital alternative work? We know that suppliers extend credit to our firm and that 99.9% of the time this credit is unsecured. We use their products and services to create our own revenues of course. This therefore is a classic example of short term credit. The process of course continually renews itself - we buy products from our suppliers, pay them, and purchase more.

Naturally business works best when it's a two way street, suppliers depend on us for their own revenue and profits, so they are incented to do business with us. They are therefore, in many cases open to extending more credit than we might be able to arrange with others.

As we have stated, business owners are cautioned to continually monitor the credit and working capital they derive from supplier financing. Naturally when things go awry with a supplier that ' free working capital ' has the potential to be terminated .In some cases as an example a solid customer / supplier relationship might go away because our suppliers parent firm invokes a different business model/strategy.

Our key point though is that businesses must nurture that supplier relationship by maintaining payments in a regular manner. Supplier financing should never be considered a right, it should be a fostered and earned relationship. That's why finance textbooks never have 'supplier financing 'as a working capital strategy at the top of the Sources of Capital list!

So in summary, when a business realizes it needs funds that might not otherwise be gained via borrowing, issuing new equity, or attained via normal profit growth the solution is to also consider working with key suppliers for special payment terms or extended and higher credit limits .

Customers can monitor their supplier credit by simply expressing current liabilities as a percentage of debt and ensuring the ratio does not get out of control. Naturally there will be peaks and valleys in supplier financing working capital, and the bottom line is that it must work for the customer and the supplier.

Related Articles
  A Great Working Capital and Cash flow Strategy
  Working Capital Financing
  Working Capital Financing – Canadian Challenges and Solutions
  Working Capital Financing – Does My Firm need a Working Capital Loan
  Business Working Capital Financing
  Purchase Order Financing and Factoring
  Understanding Cash Flow For Business and Why Receivable Factoring Just Might Be The Solution
  How The Cost of Factoring Finance Makes Sense In Accounts Receivable Financing
  Commercial Factoring And Receivable Financing Strategies in Canada
  Factoring In Canada - Canadian Receivable Financing Options
  Equipment Finance – Sale and Leaseback Solutions Canada
  The Secret Of Commercial AR Factoring And An Accounts Receivable Financing Loan In Canada
  Working Capital Financing – Canada
  What If Inventory Financing Lenders Were the Solution to Your Cash Flow Based Financing
  Financing Films – Use your Tax Credits for Film Cash and Working Capital
  Why A Merchant Cash Advance For Business Funding Is A Solid Loan Alternative Strategy in Canada
  Surviving A Working Capital Financing and Funding Challenge
  Business Finance Options Canada – Start Up & Commercial Loan Corporate Credit Facilities
  Sources of Working Capital Business Financing
  Back By Popular Demand ! Canadian Working Capital Cash Flow Financing And Loan Alternatives

Article Tags: supplier financing, working capital



Related Forum Posts
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!
Book: Secrets of Six Figure Women - Secrets of Six Figure Women: Surprising Strategies to up your earning and change your life Barbara Stanny, 2002 Jacket: Maybe you've noticed - a subtle trend is gathering steam. Quietly and steadily, the number of women making six figures or more is increasing, and it continues to rise at a rate faster than for men. From entrepreneurs to corporate executives, from white collar executives to free lancers and part timers, women are forging careers with considerable financial success. Through extensive research and hundreds of interviews, including dialogs with more than 150 high earners whose annual incomes range from $100,000 to 7 million, Stanny discovered that ...they all had certain traits in common: 1) a profit motive 2) Audacity 3) REslience 4) Encouragement 5) Self-awareness 6) Non-attachment 7) Financial knowhow She amplifies on these in the book itself. Table of Contents Intro: Welcome to the era of the six-figure woman 1. The Queen in the Countinghouse 2. The Lowdown on low earners 3. Raising the bar 4. Strategy 1: The Declaration of Intention 5. Strategy 2: Letting go of the ledge 6. Strategy 3: Get in the Game 7. Strategy 4: Speak Up 8. Strategy 5: The Stretch 9. Strategy 6: Seek Support 10. Strategy 7: Obey the rules of money 11. Claiming our power Appendces: Resources and websites Tips for getting out of dent Investing Basics: Wealthbuilding 101
Re: What is Your Favorite Thing About Owning A Business? - [quote="freddyb45":1t3lpfi8]For me it's the fact that all the time and effort you put in is worth a lot more, due to it making you "business" more profitable. Working for yourself is also a positive, although employing people you can trust is quite different.[/quote:1t3lpfi8] I like this idea. Working for yourself means you are investing in your own future, not someone else's, although there is value in working for someone else first to gain experience and confidence. Working for yourself does not automatically mean success, fame and fortune. For most entrepreneurs, it takes much work and dedication to get to the point of financial success and comfort - sometimes years. But the benefit is, again, you know you are investing in yourself and building equity for your own future. GT :-]
Del Castienne - International Business and Project Brokers - In addition to the above, Del Castienne is an international brokerage firm specializing in various entrepreneural services. Del Castienne is more than just a brokerage, as we facilitate Private International Venture Capital for Business and Projects from Commodity Speculation Transactions, MBO, MBI, M&A, Bridging Finance, Patents, Branding, JV, Corporate Advisory Services, Business Plan Development, etc.. Del Castienne is linked to 1200 private international Venture Capital consortiums and Funding Syndicates with a funding capacity of $ 115 billion and 5000 international Investment Bankers and Business & Project Brokers. This in itself should provide you with a gateway to the best source of funding in the world. Through Del Castienne any entrepreneur can have up to a potential success rate of 25% (conditions apply) with absolutely no up front costs. Del Castienne charges a maximum of 5% commission which is far below the international standard of 10% - 12% on project value. If you are tired of running back and forth with countless dissappointments, please give us an opportunity to assist you. Our minimum Venture Capital amount is $1 million and we a Commitment Letter can be provided with in 30 days after formalities are in place and your information was received.
Re: What can you do if your franchise is hit by a scandal? - GT - Brilliant Strategy... What can I add? I'm at a loss for words...so I'll shut up now...


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Why We MUST Reinvent The Wheel

Local Marketing: 3 Simple Low-Cost Strategies

3 Competencies of Leadership

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.