The problem is real
Suppliers fund the gap between delivering and being paid. On 60 day terms a supplier with $12 million of annual sales to one customer is carrying $2 million of that customer's working capital at any time. They fund it with an overdraft, invoice finance, factoring or by paying their own suppliers late. Every one of those has a cost, and the cost is priced somewhere: into the quote, into the relationship or into the supplier's resilience.
This is not a complaint about buyers. It is how trade credit works. The question is what a buyer does about it once they notice.
The default answer, and what it assumes
The standard response is a supply chain finance programme. A funder pays the supplier early at a discount pegged to the buyer's credit rating. The buyer pays the funder on the original terms, or longer. The supplier gets cheaper money than they could borrow on their own. The buyer often stretches terms to pay for it.
The supplier wants to borrow
Many do not. They want to be paid. A programme that offers them a loan against an invoice is a different proposition from being paid the invoice, and plenty of suppliers decline it.
Enrolment is free
It is not. Onboarding to a funder's platform, KYC, a new agreement, a new reconciliation flow. For a supplier with twenty large customers that is twenty programmes, each slightly different.
The buyer's stretch is invisible
It was. Since 2024 supplier finance arrangements must be disclosed in the notes to the accounts, and payment times reporting in several markets measures how fast the supplier is actually paid.
When the assumptions hold, a programme is the right tool. For a large, strategic supplier with thin margins and a strong appetite for cheap funding, it can be the best thing a buyer does for them. The problem is that programmes get rolled out to a supplier base, not to a supplier, and most of the base does not fit the assumptions.
What early settlement does differently
Early settlement is the older idea. The buyer pays the invoice before the due date in exchange for a discount the supplier agrees to, invoice by invoice. Nobody lends anyone anything. The supplier is paid. The buyer earns a return on cash that would otherwise sit at bank rates.
A $100,000 invoice on 60 day terms. The supplier offers 1.5% to be paid on day 10. The buyer pays $98,500 fifty days early. For the supplier that is cheaper than most overdrafts on 50 days of money, and it arrives with no agreement to sign. For the buyer, $1,500 on $98,500 over 50 days annualises at close to 11%, which is more than their cash earns anywhere else and more than most facilities cost.
Someone lends
- A funder pays the supplier, the buyer pays the funder
- Programme level: enrol the base, run it for years
- Supplier signs with a third party
- Disclosed as a supplier finance arrangement
- Buyer often extends terms to fund it
Someone pays
- The buyer pays the supplier early at an agreed discount
- Invoice level: this one, not that one, this quarter, not next
- Supplier agrees to a discount, nothing else
- An ordinary trade payable, settled early
- Buyer earns a return on cash it was holding anyway
Why it is not more common
Because it needs cash, and the buyer wanting to help a supplier is often the buyer who is also managing their own position tightly. A finance programme lets the buyer appear generous with someone else's balance sheet. Early settlement asks the buyer to use their own.
That constraint is less fixed than it looks. A buyer settling early on card rails is paying the supplier now and paying their card issuer at the statement date. The discount is earned on the early date. The cash leaves on the later one. The supplier has been paid, not lent to. The buyer has used nobody's balance sheet but their card programme's, which they were already paying for.
Disclosed under IAS 7
Since 1 January 2024 a supplier finance arrangement, where a finance provider pays the supplier and the buyer pays the provider later, has to be disclosed in the notes: the terms, the carrying amounts, the range of payment due dates and how they compare with ordinary payables. The stretch is visible to anyone reading the accounts.
An ordinary payable, settled early
The supplier is paid by bank transfer before the due date at an agreed discount. The buyer's commercial card funds it and is settled at the statement date, as any card spend is. No finance provider has paid the supplier on the buyer's behalf and the supplier has agreed to nothing but a discount. There is no arrangement to disclose.
The test. If your supplier would rather be paid than borrow, and you could fund the payment without drawing your own cash, a finance programme is answering a question nobody asked. Pay them.
Where that leaves a buyer
Not with a rule. With a question per supplier rather than per base, which is the same question we asked about approved invoices: is the way they are paid a decision or a habit? Some suppliers want a funder and a programme is right for them. Most want to be paid sooner and would give something for it, and for those the cheaper, simpler, undisclosed answer is to settle early and fund the settlement in a way that does not drain your own position. Deciding supplier by supplier is more work than enrolling a base. It is also the only version that treats the supplier's liquidity problem as theirs to describe rather than yours to solve for them.
Pace sets the discount. Flow funds the payment.
Pace: Dynamic Discounting is invoice-level early settlement on terms the supplier agrees to. Combined with Flow, the supplier is paid early by bank transfer and your cash leaves on the card statement date.
Sources: IFRS Foundation, Supplier Finance Arrangements, amendments to IAS 7 and IFRS 7, effective 1 January 2024. Worked figures are illustrative; discount rates are set supplier by supplier.