How Late Payments to Vendors Spawned a New Business

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.