23 May How a revolving credit facility can strengthen relationships with your suppliers
Once approved, a revolving credit facility can be used, repaid and re-used as often as your business’s cashflow cycle requires. This is perfect for growing businesses who do not want to be held back by lengthy credit application procedures and who need to dip into a source of additional working capital from time to time. And they also allow a business to forge and maintain strong, fruitful supplier relationships.
What is a revolving credit facility?
A revolving credit facility is essentially a loan or credit line that provides a consistent and pre-approved source of secondary or complementary cash flow for a business. As part of a structured financial strategy, it allows the business to keep a healthy flow of working capital and remain ‘liquid’ when experiencing unforeseen or seasonal periods of compromised or restricted cash flow.
The defining characteristic of a revolving credit facility is that once approved, the business does not have to use the entirety of the credited amount at once; it can dip in and out to re-use the facility as it sees fit for the requirements of its working capital situation.
As long as repayments are made according to the prearranged credit periods (e.g. 60-120 days from invoice) and any other relevant transaction fees are paid, it can be used as and when necessary to maximise benefit to the business.
What are the benefits?
A revolving credit facility allows your business access to working capital precisely when it’s needed. By being constantly ready for use, it smooths out the annual ebb and flow of cash by providing the necessary ‘bridge’ across sudden or seasonal gaps in working capital. This means that when opportunity presents itself, your business is not held back or delayed by lack of cash or traditional lengthy credit application procedures.
Having a well-structured, agile working capital strategy can ensure you have the added liquidity to fund growth, streamline your processes, reduce costs, enhance service levels and seize new investment opportunities. A revolving working capital solution can become an essential ongoing part of this strategy, with less paperwork, increased agility and better value.
Where a revolving credit facility really comes into it’s own is the flexibility it can provide to businesses looking to secure and maintain reliable and growth-focused supply chain relationships.
Keeping suppliers happy
A healthy supply chain is vital to running a successful business. Ensuring you have an established, reliable inventory source gives your business the stability and agility it needs to respond to demand fluctuations, and provides the backbone for customer success.
Suppliers of course have their own priorities. They are looking for reliable, low risk customers. To secure fruitful, long-lasting relationships with them, you must take these priorities into account.
Suppliers want to be paid on time and receive regular orders. They want less seasonal demand cycles, reasonable lead times and secure relationships with customers whose needs are closely aligned with their own production and distribution methods.
Ideally this means cash payments for bigger orders, and these bigger orders don’t fluctuate dramatically. A business that has the working capital to fulfil these priorities will be in a strong position when it comes to negotiating terms with their suppliers.
Negotiating better terms
Having a pre-approved credit line available as and when required ensures that should a sought-after supplier opportunity present itself, you have the working capital to negotiate from a position of strength. So you therefore have you more power to dictate terms with your most preferred suppliers. This in turn leads to increased competitiveness through superior product lines, service delivery, and supply.
Tendering for larger contracts
The extra liquidity that a consistent working capital solution can provide allows you to tender for larger contracts, fulfil and secure more economical supply orders, with larger, fewer shipments. This makes you more attractive to suppliers who prefer to work with larger shipments, and opens up the possibilities of bulk discounts.
Smoothing out demand cycles
Seasonal fluctuations in demand can be a headache for suppliers, impacting their cash flow status as well as yours. With a revolving credit facility as part of your wider cash flow strategy, you can smooth out the peaks and troughs of demand and close the seasonal gaps that create interruptions in your supply chain, meaning more regular orders for your suppliers, and optimised stock levels for you.
Early payment discounts
Having working capital constantly available for supplier invoices allows you to pay them as soon as they arrive on your desk. With their own cash flow supply in mind, suppliers are often more than happy to offer early or swift payment discounts, allowing you to more than offset the cash flow impact of opening a line of revolving credit, while freeing up more opportunity to increase profits.
Once a mutually beneficial relationship is developed, and your business is seen as a preferred, low risk customer, then further benefits may arise. Suppliers may make suggestions for improved supply chain processes and delivery patterns, further improving your profit margins. You could also potentially partner with major preferred suppliers to share risk, enjoy extended payment terms, increased warranty periods or even hold some inventory on consignment.
When a revolving credit facility is made a part of a working capital optimisation strategy, where cash flow is healthy and invoices are paid in a on time, payment extending approaches are not necessary. This means common issues that can erode supplier goodwill, resulting in slower delivery times, less willingness to fix defects and more onerous payment terms can be avoided.
Pay4 provides a revolving credit facility to make payments to your suppliers, both in the UK and internationally, allowing you to negotiate, secure and maintain the best possible relationships with your supply chain, putting you in the driving seat for growth.