Small business owners have too much on their plates to also have to learn the intricacies of supplier finance. Luckily, we’ve put together this simple reference guide to help the average entrepreneur understand the language behind the world of invoicing, remittance, and small business lending.
Supplier Finance 101
Looking to learn more about supplier finance? Use this handy reference guide to better understand key terms and definitions.
Frequently Asked Questions (FAQs)
Glossary of Terms & Acronyms
Accounts Payable (AP) refers to unpaid invoices — the money that buyers owe their suppliers for goods and services delivered, but not yet paid for. Accounts Payable are liabilities.
Accounts Receivable (AR) refers to unpaid invoices — the money that suppliers have a right to collect for goods and services that have been delivered, but not yet paid for. Accounts Receivable are considered assets.
Basis Points (BPS) are a unit of measure used to describe a percentage of change in interest rates. One basis point is worth 1/100th of a percent, which can be written as .01% or 0.0001.
Dynamic Discounting (DD) is an arrangement between a buyer and supplier where the supplier may elect to be paid earlier than the invoice maturity date in exchange for a price reduction. The discounted amount is usually proportional to how early the payment is.
Days Inventory Held (DIH) represents how long it takes a supplier to turn its inventory into sales. This is also referred to as Days Sales of Inventory (DSI). Generally, suppliers want to keep this number as low as possible.
Days Payable Outstanding (DPO) refers to how long it takes a company to pay its suppliers for outstanding invoices.
Days Sales of Inventory (DSI) is the same as Days Inventory Held (DIH). Days Sales of Inventory represents how long it takes a supplier to turn its inventory into sales. Generally, suppliers want to keep this number as low as possible.
Days Sales Outstanding (DSO) is the average number of days that a supplier waits to receive payment from their customer (the buyer).
Enterprise Resource Planning (ERP) refers to software or systems that integrate various major aspects of one large business. ERP systems allow departments to see what other departments are doing, and communicate between them.
A Letter of Credit (LC / LoC) is a written guarantee issued from a bank to a supplier, stating that the supplier will receive a buyer’s invoice payment in full and on time. In the event of non-payment, the bank is responsible for covering any outstanding amount to the supplier. Letters of Credit tend to be expensive due to the manual nature of checking discrepancies in documentation, managing administrative costs, and navigating bureaucracy.
The London Interbank Offered Rate (LIBOR) is the internationally agreed upon benchmark for short-term interest rates among banks, updated daily in five different currencies. The 3-month U.S. dollar rate is often referred to as the “current LIBOR rate.”
Supply Chain Finance (SCF) is an automated, collaborative model for invoice payment that allows suppliers to be paid earlier using lender financing calculated based on the credit rating of the buyer.
Supply Chain Management (SCM) is the oversight of the entire parts and labor process — often involving many outside companies — that goes into producing a final product delivered to the end user. Key aspects of SCM include product development, sourcing, production, and logistics.
Working Capital Management (WCM) refers to the balancing act of managing current assets and current liabilities. Working Capital Management is critical because companies always need enough cash flow to pay off short-term debt and operating expenses.