Understanding supplier finance

Supplier credit can be an extremely useful form of short-term finance and working capital for businesses. Supplier credit is essentially like getting a “tab at the bar”. Your suppliers provide you with stock, raw material and/or services on a 30-day account, allowing you to sell the goods before you have paid for them. 

Since the announcement of the National Credit Act (NCA) of 2005, many suppliers require their 30-day account holders to be incorporated businesses, and they may not be prepared to work with Close Corporations (CC) or Sole Proprietary companies. Please note that while numerous CCs exist, the New Companies Act states that no new CCs can be formed. If you are already registered as a CC, you can still continue to operate as one.

Some smaller suppliers don’t have very formal systems in place, so they might be more willing to sell you supplies on trust. Larger suppliers will expect you to submit a formal application and your business will then undergo a credit check.

Larger suppliers often outsource their credit checking to companies who specialise in this, and who will provide insurance to the supplier if the account doesn’t get paid. They’re not playing around, so you can be sure that their credit checks will be thorough. 

If you’re a small business, they’ll check your bank records, and look at how you rate with the credit bureaus. They also require trade references. If you’re looking for a more substantial amount, they could request your business’ financial statements and balance sheet, as well as your personal assets and liabilities statements. In some cases, they might even pay you a visit in order to really check you out.

Generally, 30-day accounts don’t carry any costs, interest or administration fees.  What this means though, is that you are likely to forfeit any cash discounts that might be offered under normal circumstances. But, if you buy a particular product from only one supplier, you could negotiate a discount based on volume. You need to investigate what the costs and opportunities will be if you go this route.

However, be warned that if you do not pay the account within the 30 days, you may be charged interest on the outstanding amount and if this happens often, the supplier may choose to close your account.