Payables-Based Financing

Intro

Payables-based loans, also known as accounts payable (AP) financing or supply chain finance, are a form of short-term financing where a third-party lender helps a business (the buyer) manage payments to suppliers by advancing funds based on outstanding invoices.

This allows the buyer to extend payment terms while ensuring the supplier gets paid promptly, often at a discount. It's particularly useful for e-commerce and CPG brands to optimize working capital without relying solely on revenue or assets.

How the Process Works

1. Setup and Application

The buyer applies for financing with a lender, providing details on suppliers, invoices, and credit history. The lender evaluates the buyer's credit (not the supplier's) and onboards suppliers (e.g., via KYC checks).

2. Invoice Approval

The buyer issues or approves an invoice for goods/services received from the supplier.

3. Lender Intervention

The lender offers to pay the supplier:

• Early (at a discount, e.g., 2–5% off the invoice value), or
• On the due date (full amount)

If the supplier agrees to early payment, the lender pays them immediately.

4. Repayment

The buyer repays the lender the full invoice amount on an extended due date (e.g., 60–90 days later), plus any fees or interest. The lender earns from the discount or fees.

5. Completion

Funds are transferred electronically. If the supplier doesn't opt for early payment, the process reverts to standard terms.

Example

A CPG brand (buyer) owes a supplier $100,000 for inventory, due in 30 days.

1. The lender pays the supplier $97,000 immediately (3% discount)
2. The buyer then repays the lender $100,000 in 60 days, plus a small fee

This gives the buyer extra time to sell the inventory and generate cash before paying, while the supplier gets cash now instead of waiting.

Benefits

For Buyers

• Extends payment terms (improves cash flow and working capital)
• Stabilizes supply chain relationships
• Leverages their strong credit for better rates than suppliers could get independently

For Suppliers

• Gets paid faster (reduces cash gaps)
• Often at lower effective costs than their own financing options
• Predictable payment timing

Overall

• Enhances vendor relationships
• Creates predictable cash flows
• Improves operational efficiency without diluting equity

Risks and Drawbacks

Credit Risk: Lenders bear default risk from the buyer. Suppliers may face discounts that cut into margins.

Power Imbalances: Larger buyers might pressure suppliers into unfavorable terms or mandatory participation.

Costs and Eligibility: Fees/interest can add up (1–5% of invoice). Requires good buyer credit, limiting access for early-stage businesses.

Accounting Complexity: May obscure debt on balance sheets, potentially confusing investors or misrepresenting financial health.

When Payables Financing Makes Sense

• You have strong credit and can negotiate good rates
• You're managing large supplier relationships and want to keep them happy
• You need to extend your cash conversion cycle
• Your suppliers would benefit from early payment options

When to Be Cautious

• If you're using it to mask cash flow problems rather than optimize them
• When the fees outweigh the working capital benefits
• If suppliers feel coerced into participating

Payables vs Receivables Financing

These are two sides of the same coin:

Aspect	Payables Financing	Receivables Financing (Factoring/ABL)
Who gets cash	Supplier (early)	You (against your invoices)
Who pays	You (extended terms)	Your customers
Primary benefit	Extend your payment timeline	Accelerate your cash collection
Credit basis	Your creditworthiness	Your customers' creditworthiness

Many growing businesses use both: receivables financing to get paid faster, and payables financing to pay slower, maximizing working capital in the middle.

The Evolution of Payables Financing

This financing evolved as a fintech innovation, but hasn't always proven as resilient as asset-based lending due to dependency on buyer-supplier dynamics. When relationships strain or buyers face credit issues, the system can break down.

It's most effective when used as an optimization tool by healthy businesses, not as a lifeline by struggling ones.