What’s Vendor Finance? Why Do Some Call It Bullying?

It often makes good business sense to delay paying suppliers, keeping cash free for other purposes. Now the concept is being taken to new levels of complexity. A global industry has grown up of financial go-betweens who buy unpaid invoices at a discount. The firms give vendors cash sooner than if they’d waited for customers to pay -- if they’re willing to accept less than what they’re owed. Financiers say the practice, known as supply chain financing, is a “win-win” for all sides, but small business advisers call it “supply-chain bullying.” Regulators are wary, concerned that big companies use it to mask indebtedness and as a cover for crunching small contractors.

In theory, it speeds up payments owed by businesses to their often cash-strapped suppliers. Third parties, traditionally banks and now also independent intermediaries backed by investors, pay suppliers the value of their outstanding invoices minus a discount. Proponents say the arrangement leaves all sides happy: Buyers get their goods weeks, or even months, before having to pay for them, while sellers get paid more quickly -- something many small companies aren’t used to. The intermediary closes the loop by collecting the full invoice amount from the buyer at a later date and profits from the spread.