What Finance Costs do Suppliers pay for Early Pay Finance?

Early pay options such as dynamic discounting, supply chain finance, and working capital platforms all offer a company a way to extinguish a receivable before due date.  Pcards are a convenient buying tool for low dollar purchases and virtual cards have become more commonly used for transactions into the six figures and provide business process automation support in accounts payable.

But just how do these different techniques compare in terms of cost of money?  And how do they compare to factoring alternative?

All these different techniques carry different rates and in some cases transaction fees.  From a supplier’s perspective, they have the option to wait until invoice maturity, elect to opt-in on some form of early payment if offered, or they may already be using these receivables as part of an Asset Based Lending scheme, Factoring solution, or Invoice discounting line with their bank.

What makes this not a fair comparison is that in factoring, the Factor undertakes credit management and collection of its clients’ book debts whereas with invoice discounting, a business collects its’ own book debts.  Typically the receivables are assigned to the factor, and notice of assignment is served on the buyers – by way of an introductory letter, assignment clause on all invoices, and statement of accounts from the factor.  Factoring offers a few key services to the seller:

  • Finance
  • Ledger management relating to the receivables
  • Collection of receivables
  • Credit cover against default by the buyers

Factor’s shift risks which they do not assume back to their client via chargebacks and indemnities.  For example, in full recourse factoring, language in contracts can state that in the event any purchased account is not paid and collected within 120 days of invoice for any reason, then the Factor shall have the right to chargeback such account to seller.

What gives Early Pay programs an advantage over traditional methods of financing suppliers like factoring or invoice discounting are many operational costs are eliminated and credit insurance may not be needed (of course, in Retail these days, given the high risk nature – see Toys R Us bankruptcy, its based on customer mix).  So for example, ledger management relating to the receivables, receivables collection, and credit cover against default by the buyers are costs that can be avoided, giving early pay programs advantages in financing suppliers.  In addition, factors finance 75% to 90% of the invoice value to manage dilution risk.

The disadvantage of early pay from the supplier’s perspective is that typically only a small percent of customers and overall receivables are typically covered under various programs.  Remaining customers may require credit insurance.

The table below provides an indication of the rates offered under the various techniques. Of course, actual rates offered can and are different, but the rationale provides a reason where most suppliers fall under each technique.

Example Rates Based on Early Pay Finance Technique

Supplier Technique

Rate Range


Dynamic Discounting – Self-Funded Discount taken off of invoice based on days to maturity.  APRs can range from 18% to 36% or more. Dynamic discounts differ from traditional discounts as the discount is calculated as a function of the time of payment, in other words, it is based on a sliding scale.  This allows the buyer to set terms based on internal hurdle rates, supplier groupings, and other factors. Treasury looks for yield with a certain amount of cash that is dedicated to funding tail suppliers.While the returns are risk-free, Treasury looks to enhance income.
Purchasing Cards Suppliers typically pay anywhere from 2.65% or more of invoice value, making these APRs very expensive based on a 45 day invoice term as a substitute. The most substantial portion of the merchant discount rate is the interchange fee assessment, with rates varying according to such factors as transaction size and level of data included.
 Virtual Cards Suppliers typically pay anywhere from 1.25% or more of invoice value, and these are typically done on larger invoice values. Rates need to be lower as these cards are typically targeted on larger invoice values.
Supply Chain Finance or Reverse Factoring Rates are based on Libor + the credit quality of the obligor. So if this is a program offered by Nestle, suppliers pay Libor + 185bps as an example.  If this is a BBB+ company program, suppliers pay Libor + 400bps as an example Depending on the structure of the agreement, the risk is pure Buyer or Obligor risk of payment being made on due date.  Pricing is tied to the quality of the underlying obligor.
Working Capital Automation – Self Funded We have seen rates in the 5% to 8% range for very large CPG and Retail companies (and others). Buyer provides stated return objectives based on their internal return guidelines.   Buyers typically offer a rate range where they will accept invoices.
Supplier financing offered through P2P or Supplier Networks – Third Party Funded Rates seen are in the 12% to 18% range, similar on the low end to factoring without the transaction fees. Rates can vary tremendously here based on the obligor, the type of funder, and the risks perceived of an “approved” invoice.
Cash on Invoicing Indicative rates are 1% per month, or `12% The risk is both dilution risk pre- approval and Buyer risk post approval.
Factoring Factors charge both a factoring fee (for example, 3% on every $1,000) plus Prime + method on money advanced.  Interest is charged only on money advanced per invoice (can range between 75% to 90%) and GBI has seen rates of between 8% to 15% in developed countries. So for a $1000 invoice that is advanced 80%, the total cost would be $800 x 12% + the factor fee of ($1000 x 3%) Factoring fees are charged on the gross amount of the invoice. The second fee is the interest charge on the money advanced per invoice based on advance rate.


GBI has produced five Supply Chain Finance Guide publications (prior publications in 2007, 2009, 2012, 2014, 2016).

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