Supply chain finance is an arrangement where your customer's finance provider pays your invoice early and your customer repays it on the original due date. The buyer sets it up. So if you're a small supplier you don't buy one, you get invited into one, and the only decision you own is whether to take the money.

‍

You don't set up a supply chain finance programme, you get invited into one

Almost certainly you can't have one, and the banks are open about who can. A programme is sold to the finance team of a large buyer, and the entry thresholds are published.

Barclays Corporate Banking, which houses its supplier finance product, supports businesses with a minimum turnover of £6.5 million. Bank of Scotland, selling the same product as Lloyds, sends anyone turning over up to £25 million towards invoice finance instead, and describes programmes as 'increasingly valuable to treasurers'. That word is the tell. These are treasury products for companies with a treasury.

Which leaves three readers, and three different answers. If you came here to set a programme up, that is the answer. If a large customer has invited you into theirs, the rest of this page is the decision you actually face. And if you simply want cash against invoices you've already raised, on your own initiative and without waiting to be asked, that is financing your own invoices and it works quite differently.

‍

How a programme works when you're the supplier

Your part in a programme is small, and it starts after you've already done the work. The steps run like this:

1. You deliver the goods or services and invoice your customer as usual.
2. Your customer approves the invoice and confirms to the funder that it is valid and will be paid in full on the due date.
3. You choose whether to take the money early. If you do, the funder pays you, and deducts a discount for the days you're being paid ahead of the due date.
4. On the original due date, your customer pays the funder the full invoice amount.

Two things make this different from borrowing against your own sales ledger. The price is set by your customer's credit standing rather than yours, which is the whole point of the structure and usually makes it cheaper than anything you could arrange alone. And you receive the full invoice value less the discount, rather than a percentage advance with a balance released later. Bank of Scotland puts it plainly: the supplier can 'leverage the buyer's credit rating to reduce their cost of funding and access 100% of the invoice value due from the buyer'.

One detail is worth knowing because it surprises people. The funder is buying or taking over the receivable, which is why the money reaches you from the funder rather than from your customer. In return, the bank describes payment as accelerated 'on a non-recourse basis' once your customer has approved the invoice. If your customer later fails to pay the funder, that is the funder's problem rather than yours.

‍

What the early payment actually costs you

A single deduction from each invoice you choose to accelerate, priced on how many days early you get paid. There's normally no facility fee, no contract, and no charge over your sales ledger, because you aren't borrowing. The number worth working out is what that deduction costs you as an annual rate.

Nobody publishes a rate, so take the arithmetic rather than the figure. Say you have a £40,000 invoice on 60-day terms, you're offered the money 50 days early, and the portal shows a deduction of £411. These are round numbers for illustration, not a quote. That deduction is 1.03% of the invoice. Multiply it by 365 and divide by the 50 days you gained, and it is about 7.5% a year.

Now you have a number you can compare with something: your overdraft rate, your invoice finance charge, or the rate on a business loan. If the programme comes in below them, it is the cheapest money available to you, and that is often exactly what happens, because it is priced on a company far larger than yours. If it comes in above them, you're paying a premium for convenience. Do this sum once with your real figures and you'll know which of the two you're looking at for every invoice afterwards.

‍

{{reportpage-cta="/seo-components"}}

‍

What you give up, and the three things to check first

Not much, in most cases, which is why these programmes are popular. But three things decide whether the invitation is a favour or a rearrangement, and only one of them is about the rate.

Check who pays the fee, because the law treats the two cases completely differently. Large UK companies have to report how fast they pay their suppliers, and the government's guidance on that duty sets out what happens when a programme is involved. Where the supplier receives the full amount 'without having to pay a fee or having any amount deducted', the buyer may report the date the supplier was paid by the funder. Where the supplier 'does not receive the full amount or has to bear the cost of any fee', the buyer must report the date the funder was paid instead, which is the original due date.

The guidance's own example is a buyer on 60-day terms offering payment in 15 days. Free to the supplier, and the buyer reports 15 days. Charged at 3%, and the buyer still has to report 60. So a programme you pay for does nothing for your customer's published payment record, while one they pay for improves it considerably. That is a reasonable thing to raise when they ask you to join.

Check whether your payment terms got longer at the same time. A programme that arrives alongside a move from 30-day to 90-day terms has not accelerated anything. It has stretched your terms and sold you back the difference, and you are now paying a discount for cash you used to receive for nothing.

Check whether the early payment is actually guaranteed. Usually it isn't. You choose invoice by invoice, which is good, but the facility behind it generally sits at the funder's discretion too, and it can be reduced or withdrawn if your customer's credit standing changes. A programme is worth having, and it is not worth planning your cash flow around as though it were committed.

You can check the customer who invited you before you answer. Their payment performance is public, so you can check when a business pays its invoices on GOV.UK, including whether they say supply chain finance is available to suppliers. Since accounting periods beginning on or after 1 January 2024, amendments to IAS 7 and IFRS 7 issued in May 2023 have also required companies to disclose their supplier finance arrangements, the amounts involved, and the liquidity risk attached. If the invitation came with a stretch in terms, their own accounts will tend to show it.

‍

So should you join your customer's programme?

The choice is yours but free money today instead of money in 60 days has no downside worth the argument, and declining it just leaves you funding your customer.

If you're paying for it, do the annual sum and compare it with your own cost of borrowing. Below that, it's worth the look. Above it, you can still decline the programme and keep the contract, because the invitation is optional and your customer's own reporting is better served by you joining than by you being paid late.

And if the terms moved at the same time, treat the two as one negotiation rather than two, because that is what they are. Some of what a programme solves isn't a funding problem at all. Getting invoices in on the day the work is signed off, and knowing how a customer has treated other suppliers before you price the job, is managing the gap rather than paying someone to carry it.

‍

Is supply chain finance the same as factoring, or as trade finance?

No to either. Supply chain finance is the name of the whole category, and factoring and trade finance are narrower arrangements inside it or beside it.

The confusion is built into the words rather than into your understanding of them. The standard definitions used by the International Chamber of Commerce, BAFT, the Euro Banking Association, FCI, and ITFA give every arrangement in the category its own narrower name, and note that using 'supply chain finance' for a single technique is 'inappropriately applied'. That is why every definition you read disagrees with the last one.

The names you'll meet, and what each one means:

• Payables finance is the buyer-led programme described above, and the technique most people mean when they say supply chain finance. Reverse factoring, confirming, and approved payables finance are all synonyms for it. If you want the step-by-step and how it compares with ordinary factoring, that's the mechanic behind a buyer-led programme.
• Factoring and invoice discounting are the mirror image: you raise the finance against your own ledger, priced on your credit rather than your customer's, whether or not they offer a programme. See financing your own invoices.
• Dynamic discounting has no funder in it at all. Your customer pays early out of its own cash in exchange for a discount from you, so the cost is a price cut rather than a finance charge.
• Trade finance sits earlier in the transaction, using letters of credit and bank guarantees to fund and de-risk the purchase and movement of goods, usually across borders. Supply chain finance starts after delivery. They serve different points in the same cycle.
• Trade credit is simply the time a supplier gives a buyer to pay. It is the gap everything else on this list exists to close.
• Distributor finance and inventory finance fund stock rather than invoices, and sit in the same category without involving an approved invoice.

‍

What to do when there's no programme on offer

If you're waiting on an invoice, a Flexi-Loan can cover the gap, and you can clear it with no early repayment fee once your customer pays.

When your customer is large, that gap is unusually easy to predict. You know your terms, you know roughly when the money lands, and you know what you have to pay out before it does. Most businesses bridging a gap are guessing at the date; you aren't.

An iwoca Flexi-Loan is a business loan with flexible repayment options, and two things about it matter when the problem is timing rather than profit. You have 30 days to draw down after approval, so the funding can be agreed before you place a stock order and taken the week you place it. And there's no fee for repaying early, so it can run for the three weeks until your customer pays rather than for a year.

In action: JBN Beverages

Janet Theodore had signed contracts with Sysco and Tesco.com, but the product testing had to be paid for before anything shipped. High street banks and other lenders had turned her down. An iwoca loan funded the testing and the ingredients, and as she puts it, 'the funds were in the day after we applied'.

Read Janet's story

A loan isn't the better answer to every version of this. If your customer is offering a programme and paying for it themselves, well, almost nothing beats free. A loan is for the gap a programme doesn't reach: suppliers to pay before the first order ships, stock to buy before a peak, or a customer who has no programme at all.

There's also the other half of the problem. A programme does two things at once, paying the supplier now and letting the buyer pay later, and iwocaPay does both of those for companies far too small to be offered one. Your trade customer chooses at checkout whether to pay now or spread the cost, on orders up to £30,000, and you're paid as soon as they're approved. Like a programme, there's no recourse to you: if your customer doesn't pay us, we don't come to you for the money. Unlike a programme, you can set it up yourself this week.

‍

What it costs and what you're signing up to

With our Flexi-Loan we charge interest on the amount you draw, from the day you draw it, so the cost follows how long you hold the money. You can borrow £1,000 to £1m over a fixed term of between 12 months and five years, so you know the repayment schedule from the outset. Because there's no fee for repaying early, you can clear it as soon as your customer pays, and many of our customers only take out our finance for a few weeks, or even days.

{{business-funding-on-your-terms="/components"}}