Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How a Roofing Company Used Supply Chain Finance to Pay Subs Faster
Transcript
- Lucas: So we have talked a lot on this show about tools that help small businesses get paid faster — factoring, dynamic discounting, milestone billing. But there is a related structure that we have not covered yet, and it flips the whole thing on its head. Luna: Flip it how? Lucas: Instead of the small business trying to get its customers to pay faster, the small business uses its own credit strength to help its suppliers get paid faster. It is called supply chain finance — sometimes reverse factoring. And it is actually very common at big companies like Procter & Gamble or Walmart, but very few small businesses use it. Luna: Okay, so the small business is the buyer in this scenario, not the seller. That is a shift. Give me a concrete example. Lucas: Let us use a roofing company in Phoenix — let us call it Desert Peak Roofing. They do commercial re-roofing for property management firms. The property managers are big — think companies that manage dozens of apartment complexes — so they have negotiating power. They pay Desert Peak in 60 to 90 days. Luna: And Desert Peak has to pay its subcontractors — the crews that actually tear off the old roof and install the new one — probably a lot faster than that. Lucas: Exactly right. Subcontractors in construction typically expect payment in 15 to 30 days. Some need it in 15 days because they have their own payroll and material costs. So Desert Peak is stuck in a gap: they have to pay out before they collect. That gap is the classic cash flow trap that caps growth. Luna: I have spoken to contractors who say they turn down jobs because they cannot afford to wait 90 days to get paid. So what does supply chain finance do differently? Lucas: Desert Peak goes to a bank and says: we have three large property management clients who are creditworthy — maybe they are rated investment grade or have strong payment histories. Based on those receivables, the bank sets up a program where Desert Peak's subcontractors can log into a portal, see that an invoice from Desert Peak has been approved, and choose to get paid early — usually within a few days — by the bank. Luna: So the bank pays the sub, and then the bank waits for the property manager to pay. That sounds a lot like factoring, but the sub is the one selling the invoice, not Desert Peak. Lucas: That is exactly the nuance. In factoring, the small business sells its own invoices to get cash now. In supply chain finance, the small business is the buyer, and it is offering its suppliers — its subs — the ability to get paid early at a discount. The discount is the fee the sub pays for speed. But the discount rate is usually much lower than what factoring would cost Desert Peak. Luna: Because the credit risk is on the property manager, not on Desert Peak. And the bank likes that because the property manager is a bigger, safer name. Lucas: Right. The discount might be 1.5 percent for 60 days early. So if a sub is owed $50,000, they can get $49,250 in two days instead of waiting 60 days. That 1.5 percent is a lot cheaper than a merchant cash advance that might cost 15 or 20 percent annualized. Luna: And for Desert Peak, what is the benefit? They are not the one getting paid early; their subs are. Does that help their cash flow directly? Lucas: Indirectly, yes. Because the subs get paid faster, they are happier, more reliable, and they might even give Desert Peak a small discount on future bids. But the bigger benefit is that Desert Peak can take on more jobs. Before, they had to say no to a $200,000 project because they could not finance the sub payments for 90 days. Now, with the program in place, they can say yes, because the subs can get funded by the bank. Luna: So it is a capacity unlock. Let me push back on one thing though: this sounds like it only works if the buyer — Desert Peak — has really good credit. What about the small business that is still building its credit? Lucas: That is the biggest barrier. The program hinges on the creditworthiness of the buyer. So if you are a new business with a shaky balance sheet, the bank may not offer you the program, or the discount rates might be higher. But if you have been in business for a few years and you have a few large, well-rated customers, you might qualify. Some fintech platforms now offer supply chain finance to lower-credit buyers by pooling them, but it is still early. Luna: How does the setup work practically? Does Desert Peak need to integrate its accounting software with the bank? Lucas: Typically, yes. The bank provides a portal where Desert Peak uploads approved invoices — or the system connects to QuickBooks or whatever they use. The subs then get a notification that an invoice is available for early payment. They log in, see the discounted amount, and click accept. The bank wires the money the next day. It is pretty automated once it is set up. Luna: What about the property managers? Do they need to be involved? Lucas: Not directly. They just keep paying their invoices on their normal schedule — 60 or 90 days. The bank collects from them when due. The property manager does not need to change anything. That is part of the elegance: the customer relationship is undisturbed. Luna: Okay, so let us talk numbers. You mentioned a 1.5 percent discount for 60 days early. How does that compare to what Desert Peak would pay if they used a line of credit to bridge the gap themselves? Lucas: A typical business line of credit might cost 8 to 12 percent annual interest. On a $50,000 advance for 60 days, that would be roughly $670 to $1,000 in interest. The supply chain finance discount of 1.5 percent is $750. So it is comparable, but the line of credit uses Desert Peak's own borrowing capacity. Supply chain finance does not — it uses the credit of the property manager. So Desert Peak can keep its line of credit open for other needs. Luna: And it is cheaper than factoring. A factoring company might charge 3 to 5 percent for 60 days. Lucas: Exactly. Factoring is expensive because the factor takes on the credit risk of the small business's customers. Here, the bank takes on the risk of the property manager — much lower risk, much lower cost. The subs win because they get cheaper early payment than they could get on their own. Desert Peak wins because it strengthens its supply chain. The bank wins because it earns a transaction fee or the discount spread. Luna: It sounds like a win win win. But I imagine there is a minimum scale. A roofing company with $500,000 in annual revenue probably cannot justify the setup. Lucas: You are right. Most banks want to see at least $2 million to $5 million in annual purchases from the subs, and a few large customers. Desert Peak in our example does about $4 million in revenue, with 60 percent from three property management firms. That is the sweet spot. Luna: Are there any risks for Desert Peak? If a property manager does not pay, does the bank come back to Desert Peak? Lucas: In most programs, the bank buys the receivable from the sub without recourse to Desert Peak — meaning if the property manager defaults, the bank takes the loss. But the bank only accepts receivables from approved customers. So Desert Peak cannot just upload an invoice from a risky new client. The bank vets the customers upfront. Luna: That is a good safeguard. Still, if Desert Peak's customer goes bankrupt, the bank might tighten the program or raise fees. So there is some indirect risk. Lucas: Absolutely. And Desert Peak needs to maintain its own credit standing because the program is reviewed annually. But overall, it is a more resilient structure than relying on a single line of credit. Luna: You know, I have heard of large retailers doing this for years. But I never thought about it for a roofing company. It makes sense though — any business that pays subcontractors or suppliers before collecting from customers is a candidate. Lucas: Exactly. The principle is the same whether you are a manufacturer buying components or a contractor hiring crews. And we have not even talked about the strategic angle: by offering early payment, you become the customer of choice. Subs will prioritize your jobs over a competitor who takes 60 days to pay. Luna: That is a real edge in a tight labor market. If you can attract the best crews because you pay them in a week instead of a month, you can bid more competitively. Lucas: Precisely. And that is the kind of compound advantage that separates a business that is stuck from one that is scaling. Luna: I want to shift gears slightly because this idea of making the whole ecosystem work better — not just your own cash flow — is something I think a lot of our listeners care about. And you know, that is part of why we do this show without ads. We want to focus on the tool, not sell you something. Lucas: Yeah, that is a deliberate choice. If these conversations have moved your work forward in some small way, the best way to support that is at buy me a coffee dot com slash fexingo. Just a simple way to keep the show free of sponsors and focused on what actually works. Luna: Exactly. No pressure, just if you find value. Alright, back to supply chain finance. So Lucas, if a listener is a small business owner and they think this might work for them, what is the first step? Lucas: First, look at your payables and your receivables. Do you have a handful of large customers that pay you in 60 days or more? And do you have suppliers or subs that you pay within 30 days? If the gap is at least 30 days, and your customers are creditworthy, you have a candidate situation. Luna: And then approach your bank or a fintech that offers supply chain finance. You will need to provide financial statements and a list of your key customers. Lucas: Right. And do not be discouraged if your first bank says no. Community banks and regional banks are often more willing to work with mid-sized businesses on these programs than the big money-center banks. Also, some newer platforms like Taulia or C2FO are expanding into the middle market. Luna: Are there any hidden costs? Setup fees? Monthly minimums? Lucas: Some banks charge a one-time setup fee of a few thousand dollars. Others build it into the discount spread. You want to ask: what percentage of the invoice does the sub receive? And is there any cost to Desert Peak beyond that? In a well-structured program, Desert Peak pays nothing. The discount is entirely borne by the sub who chooses early payment. Luna: So the sub decides. That is key — it is optional. If a sub can wait 60 days, they get the full amount. If they need cash sooner, they pay a small fee. Lucas: Exactly. It is a voluntary tool. And for the sub, the cost is often lower than what they would pay for a merchant cash advance or even a credit card. So it genuinely helps the whole chain. Luna: Lucas, I want to ask about the tax or accounting implications. Does early payment change how the sub reports revenue? Lucas: Good question. For the sub, the discount is effectively a finance charge, so it is typically deductible as an interest expense. For Desert Peak, there is no tax impact because they are not the one paying the discount. The sub records the full invoice amount as revenue and the discount as a cost. It is clean. Luna: And on the balance sheet, Desert Peak still shows the full accounts payable until they pay the sub. But if the sub takes early payment, the bank pays, so Desert Peak's cash is not affected. Lucas: Correct. The liability shifts from Desert Peak to the bank. That is why it is off-balance-sheet financing for Desert Peak — a huge advantage. Luna: I can see why this is so powerful. So one last question: is there a version of this where a small business with many small suppliers can still use it, or does it only work with a few large subs? Lucas: It works better with fewer, larger suppliers because the bank wants to underwrite a manageable set of receivables. But if you have, say, 20 subs each with $10,000 invoices, you can still do it — the bank just needs to verify each sub's invoices. The administrative overhead is higher, so the minimum invoice size might be $5,000 or $10,000. Luna: So it is not for a business that pays 100 different subs $500 each. The math does not work. Lucas: Right. For that, you would look at a different tool — maybe a credit card or a line of credit. But if you have a few key partners that you pay regularly, supply chain finance is worth exploring. Luna: Good. So to wrap up: Desert Peak Roofing turned a cash flow problem into a competitive advantage by helping its subs get paid faster, using its own customers' credit strength. And it did not take on debt. Lucas: That is the headline. It is a tool that deserves more attention in the small business world. If even a few listeners look into it, I think it could change how they think about their payables — not as a burden, but as a lever. Luna: Alright, that is all for this episode of Cash Flow Conversations. Thanks for listening. Lucas: Yeah, thanks. Talk to you next time.