2) How Does Payable Finance Work?
3) Features Of Payable Financing
4) Benefits Of Payable Financing
5) Difference Between Payable Financing And Invoice Financing
Payable financing is one of the credit options that is directed towards businesses and helps them raise funds as and when required. Like any other funding option, payable finance accompanies a set of features and benefits, which allow enterprises to gauge its usefulness and limitations better.
The increasing popularity of fintech platforms has opened up a vast array of opportunities for businesses, especially the MSME sector. Invoice financing is one such option that helps a business maintain its cash flow requirements.
Fundamentally, payable financing is a buyer-led supply chain financing programme. With the help of this technique, vendors of a corporate or organisation can raise funds through unpaid invoices/accounts receivables.
It enables businesses to provide funds to their suppliers by offering discounts on receivables before the due date. This financing option is also referred to as – trade credit, vendor financing and supplier finance, among others.
There are 3 distinct parties involved in a payable financing arrangement, namely –
Generally, when a business receives products/services, they have around 30-90 days to pay their vendors or suppliers. Businesses who are vendors to large corporations can avail the option to raise funds via payable financing.
Under this financing programme, suppliers sell their accounts receivables and get an early but discounted payout from a finance provider. The creditworthiness of buyers plays an essential role in this financing option as financiers factor in the same to provide funds without recourse to the supplier (seller).
As per this arrangement, the buyer (business/corporate) pays the outstanding principal amount to the financier on maturity. Typically, payable finance services are availed by large corporate, medium-sized buyers and non-investment-grade buyers.
The most noteworthy features include –
The payable financing option is a discreet funding option. By ensuring on-time payouts, it helps to optimise operational activities of both buyer and supplier.
These are the significant benefits of payable financing –
Nonetheless, the funding option has its limitations too. It proves challenging for start-ups to obtain this financing option and requires the concerned parties to go through a lengthy documentation process.
Parameter
Payable Financing
Invoice Financing
Key component
Accounts payable is a crucial component as funds are raised against it.
Funds are raised against accounts receivable.
Usage
It helps to pay accounts payable early at a discounted rate.
It helps businesses to receive advance payment against their accounts receivable.
Collection
The financier is responsible for collecting outstanding accounts payable.
Businesses are responsible for collecting outstanding invoices.
Parties involved
Buyer, supplier and financier
Seller and financier.
Confidentiality
There is not such confidentiality as both the buyer and seller are a part of this arrangement.
It is usually confidential, as the corporate is seldom aware of the arrangement.
Payables financing is a strategy that businesses can use to maximize financial flexibility. It involves optimizing the management of accounts payable, which are the amounts owed to suppliers for goods and services received. By effectively managing payables, businesses can improve their cash flow and enhance their overall financial position.
Here are some key ways to maximize financial flexibility with payables financing -
1) Negotiating favorable terms
When establishing contracts with suppliers, businesses should aim to negotiate favorable payment terms. This may include longer payment periods, discounts for early payments, or flexible installment plans. By securing more favorable terms, businesses can improve their cash flow and maintain better control over their financial resources.
2) Implementing automation and digitization
Leveraging technology solutions for accounts payable processes can streamline operations and reduce manual errors. Automation can help in accelerating invoice processing, improving accuracy, and enhancing overall efficiency. Digitization also enables better visibility and tracking of payables, allowing businesses to make more informed financial decisions.
3) Utilizing supply chain financing
Supply chain financing programs enable businesses to optimize their cash flow by leveraging their position within the supply chain. This type of financing allows businesses to extend their payment terms with suppliers while providing the suppliers with early payment options. By stretching out payment terms, businesses can free up working capital and enhance financial flexibility.
4) Exploring invoice financing
Invoice financing, also known as accounts receivable financing, involves selling unpaid invoices to a third-party financier at a discounted rate. This provides immediate cash flow for the business, enabling them to access funds that would otherwise be tied up in receivables. By converting accounts receivable into cash, businesses can enhance their financial flexibility and fund their operations more effectively.
5) Monitoring cash flow and working capital
It's essential for businesses to closely monitor their cash flow and working capital positions. Regularly analyzing payables, receivables, and inventory levels can help identify areas where improvements can be made. By actively managing working capital and optimizing the cash conversion cycle, businesses can maximize their financial flexibility and improve overall financial health.
6) Building strong supplier relationships
Maintaining strong relationships with suppliers is crucial for successful payables financing. Open and transparent communication can facilitate negotiations for favorable payment terms and early payment discounts. Building trust and reliability with suppliers can also lead to more flexible arrangements, such as supplier financing options or extended payment periods.
As an alternative for maintaining working capital, suppliers may choose invoice discounting services from KredX and shorten the working capital cycle successfully. Such funding options help businesses raise funds within 24 to 72 hours* at attractive terms of service and simple requirements.
It is computed by adding the opening and closing balance of accounts payable of a given year; the outcome is then divided by 2.
It is also referred to as days’ purchases in accounts payable. It helps to assess the relationship between credit purchases and payments. Also, it comes in handy for measuring the average number of days an entity takes to pay its suppliers.
Bills payable is the actual invoice that serves as a request for payment made on behalf of vendors. On the other hand, accounts payable is a category in a firm’s general ledger that calculates the current liabilities.
It is a financial measure that helps to ascertain the rate at which a firm pays its suppliers within a given period. It can be described as a short-term liquidity measure.
It is computed by adding all the credit purchases and dividing it by the average balance of accounts payable for a given period. The payment requirement may vary from one supplier to another as it depends on their financial standing and size.
On the balance sheet accounts payable is treated as a current liability and is recorded accordingly.