Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Supplier Financing to Extend Payment Terms
Transcript
- Lucas: So here's a situation a lot of procurement teams face: your company is growing, sales are strong, but your cash conversion cycle is stretched. You're paying suppliers in 30 days but collecting from customers in 60. That gap eats into working capital. Luna: Right, and the instinct is often to just push suppliers to accept longer terms. But that can backfire fast. Lucas: Exactly. Today we're looking at a buyer who solved that gap without squeezing suppliers. A mid-size manufacturer — let's call them Precision Parts — with about $200 million in annual procurement spend. They were on net-30 terms with most suppliers, but their own customers were paying on net-60. That created a 30-day cash shortfall they had to cover with a revolving credit line at 6 percent interest. Luna: Which is expensive. So what did they do? Lucas: They implemented a supply chain finance program — specifically reverse factoring. The idea is simple on paper: a third-party financier, often a bank, agrees to pay the supplier's invoice early at a discount, and the buyer repays the financier on the original longer terms. So the supplier gets cash in, say, 10 days, and the buyer gets to extend to net-90. Luna: And the financier makes money on the spread between the early payment discount and the buyer's repayment. So who typically pays the financing cost in these setups? Lucas: In this case, the buyer paid a small fee — about 50 basis points of the invoice value. But because the fee was based on the buyer's credit rating, not the supplier's, it was way cheaper than what most suppliers could get on their own. Precision Parts had an investment-grade rating, so the financier offered a discount rate of prime minus 75 basis points. For a small supplier, a similar early-payment facility might cost prime plus 300 basis points. Luna: So the supplier gets cheaper financing through the buyer's credit. That's a real value proposition. Lucas: That's the key. Precision Parts rolled this out to their top 50 suppliers first — the ones representing about 60 percent of spend. They offered the option: you can choose to get paid in 10 days at a discount, or stick with net-30. But here's the twist: they also said that for any new contracts, the standard terms would be net-90, with the early-payment option available. Luna: So they effectively shifted the default. That could feel coercive. Did suppliers push back? Lucas: A few did. About 12 percent of the initial group opted out entirely — they had enough cash flow that they didn't need early payment, and they didn't want to change their own accounting. But the majority saw the benefit. One supplier told them that using the early payment option saved them about $18,000 a year in interest costs compared to their usual factoring arrangement. Luna: Eighteen grand on what volume? Lucas: That supplier had about $1.2 million in annual invoices to Precision Parts. So the savings were meaningful. And for Precision Parts, the working capital impact was significant. By moving to net-90 on those 50 suppliers, they freed up about $4 million in cash in the first year. That's cash they didn't have to borrow at 6 percent. Luna: So the math: $4 million times 6 percent is $240,000 in annual interest savings, minus the financing fees. The net gain was probably around $190,000. Not huge relative to $200 million spend, but it's real money. Lucas: Right, and it compounds. Plus there's a softer benefit: supplier loyalty. When you offer a program that genuinely saves your suppliers money, it strengthens the relationship. Precision Parts surveyed their participating suppliers after six months, and 89 percent said the program improved their perception of the buyer. Luna: That's a strong number. But I want to dig into the risks. One concern I hear is that supply chain finance can mask underlying financial distress. If a buyer is using it to delay payments indefinitely, that's a red flag. Lucas: Absolutely. Reverse factoring isn't a magic wand. If your company has weak credit, the financing rates won't be attractive to suppliers. And if you extend terms beyond what the market can bear — say net-120 — suppliers may just raise prices to compensate. Precision Parts capped their extension at net-90, which is still within industry norms for their sector. Luna: And there's the accounting treatment too. Depending on the jurisdiction, these programs can be classified as debt on the buyer's balance sheet if structured poorly. That can affect debt covenants. Lucas: That's a critical point. Precision Parts worked with their auditors upfront to ensure the program was structured as a true sale of the receivable by the supplier, not a loan to the buyer. That kept it off their debt line. The key is to use a reputable financier and have clear legal terms. Luna: So what would you say to a procurement manager listening who's considering this? First step? Lucas: First, analyze your payment terms distribution. Map out your current terms across supplier tiers. Then calculate the working capital gap. If you're consistently net-30 payer and net-60 collector, the math points to a program. Second, talk to your treasury team. They need to be on board because it involves your company's credit rating. Third, select a small pilot group — maybe your top 10 suppliers by spend. Luna: And communicate the value to suppliers clearly. Not just 'we're changing terms' but 'here's an option that can save you money'. Lucas: Exactly. One of the mistakes Precision Parts made early on was they sent a generic email announcing the change. They got pushback until they started having one-on-one calls explaining the math. Once suppliers saw the numbers, adoption jumped. Luna: Honestly, if today's episode gave you a practical angle on working capital or supplier financing that you can use, that's exactly the kind of thing we hope moves your work forward. Lucas: Yeah. And if it did, and you feel like tossing a coffee our way, that link is buy me a coffee dot com slash fexingo. No pressure, just a way to keep these conversations ad-free. Luna: Appreciate that. So back to the case — one last nuance. Precision Parts also used the program as a negotiation lever for new contracts. They said, 'Our standard terms are net-90, but you can get paid early through the program.' That made the longer terms more palatable. Lucas: Right. And over time, they expanded the program to 120 suppliers, covering 85 percent of spend. The working capital benefit grew to about $7 million. The key takeaway: supply chain finance isn't just about extending terms — it's about creating a win-win financing structure that strengthens the entire chain. Luna: One thing I'd add: it's not for every buyer. If your credit rating is below investment grade, the rates won't be attractive. But if you have good credit and a fragmented supplier base, it's worth exploring. Lucas: And the data shows it's becoming more common. A 2025 survey by the International Trade and Forfaiting Association found that 42 percent of mid-size manufacturers now use some form of supply chain finance, up from 28 percent in 2020. So the tools are there. Luna: Alright, that's a solid case study. For next time, I want to look at how one buyer used demand forecasting to reduce inventory holding costs by 25 percent. Lucas: Perfect — that's a great follow-up to today's cash flow theme. Thanks for listening.