Supplier credit explained: how to manage the gap between paying suppliers and getting paid

A supplier invoice may be commercially straightforward and still create a financing problem. The supplier wants to be paid before shipment, production or delivery. The buyer may not receive the corresponding customer revenue for another 30, 60 or 90 days. In between, cash is committed to inventory, transport and operations.

Supplier credit, supplier-payment finance (often described as reverse factoring) and factoring can all help manage this timing gap. They are not interchangeable, however. Each one finances a different point in the cash cycle, involves a different party and depends on different commercial or credit conditions.

For Swiss businesses that pay suppliers across borders, the financing decision may also sit alongside a currency decision. SwissFx's supplier-payment credit, for example, combines financing for eligible supplier invoices with payment in the supplier's required currency. That may be relevant when the working-capital gap and the international payment need arise at the same time.

The cash-flow gap begins with payment timing

Working capital is shaped by the interval between cash leaving and cash returning. A manufacturer may pay for components before production begins, carry inventory while goods are in transit and then give customers time to settle their invoices. A growing importer may face the same sequence repeatedly as order values increase.

The first question, therefore, is which part of the cycle needs to move. A company might want to delay the supplier payment, pay the supplier on time without using its own cash immediately, or receive cash from customers sooner. Those are three different objectives.

Supplier credit, reverse factoring and factoring finance different parts of the cycle

The comparison becomes clearer when the solutions are placed side by side. Supplier credit extends the time before the buyer pays. Reverse factoring lets the supplier receive payment while the buyer repays a finance provider later. Factoring brings forward cash from eligible customer invoices that have already been issued.

Supplier credit delays the buyer's payment to the supplier

Supplier credit arises when a supplier delivers goods or services but allows the buyer to pay at a later agreed date. Common payment terms include 30, 60 or 90 days. No bank or separate finance provider is necessarily involved: the supplier is effectively financing the buyer for the agreed period.

• The main advantage is simplicity. The financing sits within the commercial relationship: payment terms may be negotiated as part of the order, and there may be no separately stated interest charge. The buyer keeps its cash longer and can align payment more closely with production or resale.

  
  

• The limitation is that the supplier carries the waiting time and credit exposure. A supplier with tight margins or its own liquidity needs may refuse extended terms, limit order sizes or build the cost into pricing. The buyer may also give up an early-payment discount.

Supplier credit is therefore most suitable when the relationship is established, the supplier can tolerate the delay and both parties agree that the commercial terms remain workable.

Reverse factoring pays the supplier while the buyer repays later

Supplier-payment finance, commonly called reverse factoring, is buyer-led. The buyer arranges a financing facility, approves an eligible supplier invoice and a finance provider pays the supplier. The buyer then repays the provider on the agreed later date.

• The structure can relieve pressure on both sides of the relationship. The supplier receives payment according to the agreed commercial terms instead of waiting for the buyer's later cash inflow. The buyer preserves working capital for operations and repays later. Unlike supplier credit, the supplier does not have to fund the full extension itself.

  
  

• The limits come from credit assessment and transaction eligibility. The facility is not a general-purpose loan. Documentation, compliance checks, limits and pricing apply, and individual suppliers or invoices may require approval. The business must also be comfortable with a fixed repayment obligation even if its expected customer receipts arrive later than planned.

This structure may suit an established business with a clear supplier invoice, a temporary timing gap and a supplier that needs prompt payment. It is less suited to an undefined cash requirement or a business unable to evidence repayment capacity.

Factoring brings forward cash from customer invoices

Factoring acts on the other side of the cash cycle. A company sells or assigns eligible customer invoices to a factor and receives an advance before they reach their due date. When the customer pays, the balance is settled according to the factoring agreement, less fees and other agreed amounts.

• Its advantage is that it converts existing receivables into cash sooner. That cash can support payroll, inventory or supplier payments without asking the supplier to wait. Depending on the arrangement, the factor may also provide collections or credit-management services.

  
  

• Its limitation is equally important: an eligible customer invoice must already exist. Expected sales or future customer revenue that has not yet been invoiced cannot normally be factored. The amount of cash received and the cost depend on the financing terms, customers’ creditworthiness and how receivables are spread across the customer base. The factor may also contact customers directly, which could affect customer relationships.

Factoring may suit a company with a recurring book of creditworthy customer invoices and a need to shorten the collection side of its cash cycle. It is not a direct substitute for supplier-payment finance when the immediate issue is a pre-shipment invoice and there are no eligible receivables to monetise.

Case study: a CNY 500,000 order shows how the three structures change cash flow

Consider a Swiss manufacturer ordering CNY 500,000 of components from a Chinese supplier. The supplier requires payment before shipment. The Swiss company expects to manufacture and sell the finished goods, then receive the related customer revenue in CHF approximately 90 days later. The operating gap is therefore about 90 days.

1. If the company negotiates supplier credit

The Chinese supplier agrees to wait 90 days. The Swiss buyer keeps its cash during that period and pays the supplier at the agreed later date. This is operationally simple, but it requires the supplier to accept the delay and the associated credit exposure. The buyer should compare any change in price or lost discount with the benefit of retaining cash.

2. If the company uses supplier-payment finance

Subject to approval, SwissFx’s lending partner pays CNY 500,000 directly to the Chinese supplier, allowing the components to be released without waiting 90 days. The Swiss buyer repays the financing in CHF at the agreed date and keeps its cash available during production. It should nevertheless ensure that the expected CHF customer inflow will cover the repayment and review the applicable currency-conversion terms.

3. If the company uses factoring

The company needs eligible customer invoices that already exist. If it has receivables from other completed sales, it may factor those invoices and use the advance to pay the Chinese supplier. If it only expects revenue from the products that have not yet been manufactured or sold, factoring is not yet available for that transaction because there is no customer receivable to finance.

Checklist: compare the commercial fit, not only the headline rate

A useful comparison starts with the transaction and works backwards. The following questions help identify which structure addresses the real constraint:

The most suitable structure may also vary by transaction. A company might use ordinary supplier credit with a long-standing domestic supplier, supplier-payment finance for a larger overseas order and factoring for a separate portfolio of customer receivables. The structures can coexist if the obligations, costs and operational responsibilities remain clear.

How SwissFx supplier-payment finance works

SwissFx’s business lending service is structured specifically for eligible supplier invoices. Subject to approval, SwissFx’s lending partner pays the supplier directly in its required currency. The business then repays the amount financed up to 150 days later in its domestic currency. For a Swiss company, this means that a supplier can be paid in CNY, USD or another supported currency, while the business repays in CHF.

This structure allows the supplier to receive payment without having to extend its own payment terms, while the buyer keeps cash available during the operating cycle. SwissFx supports supplier payments in more than 140 currencies, although available payment routes depend on the currency and transaction.

Businesses may be eligible if they meet the following criteria:

• Annual operating revenue of at least £1 million.

• Minimum tangible net worth of £100,000.

• At least two years of trading history.

Meeting these criteria does not guarantee approval. Eligibility, credit limits, pricing, repayment periods and other terms remain subject to credit assessment. Individual suppliers and invoices may also be subject to approval, documentation requirements and compliance checks.

Dig deeper:

Our business lending explainer describes the financing structure, while the step-by-step guide explains how to request supplier-payment credit.

Finance the right part of the cash cycle

Supplier credit, reverse factoring and factoring all address timing, but each changes the timing of a different cash flow. The most appropriate structure depends on the strength of the supplier relationship, the availability of receivables, the length of the gap, documentation, cost and repayment capacity. For cross-border purchases, currency and payment execution should be considered at the same time. SwissFx can help eligible businesses assess whether supplier-payment credit fits a specific supplier invoice and payment route.

Disclaimer: This article is for general educational purposes only and does not constitute financial, legal, tax or credit advice. Product availability, eligibility, limits, pricing, interest, repayment periods and transaction approval depend on assessment and applicable terms. Businesses should consider their circumstances and obtain professional advice where appropriate.