Are Suppliers Guarantees Useful?

Supplier Guarantee

The sort answer is - yes - provided your supplier is willing to work within the terms of the guarantee.  We have covered supplier guarantees (also known as vendor guarantees) in a previous post. But in summary, in a supplier guarantee the factoring company agrees to pay your suppliers our of the factoring proceeds. This gives your supplier the assurance that they will get paid before you do. But, only if the order creates a factorable invoice that is funded.

There are two advantages to the supplier. First, since the factoring company pays the supplier, the vendor guarantee reduces the concern that the vendor may have about your company's credit. Second, it allows the supplier to sell additional goods to your company.

However, using this type of an arrangement is not without risks to the supplier. There are two common risks. First, your company could fail to deliver the order. This can happen and it means there is no invoice to factor and thus no payment. Or second, your company could chose NOT to use invoice factoring for that particular invoice. Remember, the factoring company only pays the supplier out of factoring proceeds. Obviously there are other risks - but these are the two that most suppliers focus on.

For a supplier guarantee to be useful to your company, you need to convince your supplier that  your company can deliver on the order AND that the invoice will be factored. Said simply, you need to prove that you are a safe risk. In my experience, supplier guarantees work best when you already have credit (and therefore trust!) from your supplier but have an increase in orders that exceeds the credit that your supplier is willing to provide. But when used appropriately, and with the right factoring company, they can help your company grow.