Major clients often dictate payment terms unilaterally, leaving you as a supplier to bridge the resulting cash gap.
As a supplier to a large OEM—for instance, in the high-tech manufacturing sector across the Eindhoven area—you often have limited leverage to negotiate payment terms. Large tier-one clients typically enforce standard terms of 60, 90, or even more days, and these are usually locked into framework agreements that are difficult to alter.
Yet you do not simply have to absorb that gap between delivery and payment entirely out of your own working capital. Several financing structures are specifically designed for this reality, and in this article we weigh their respective pros and cons.
Supply chain finance: funding via the client
With supply chain finance, also known as reverse factoring, the financing facility is set up not by you as the supplier, but by your corporate client. The OEM partners with a bank or financier that pays approved supplier invoices early, at an interest rate typically based on the corporate client's credit rating rather than your own.
For you as a smaller supplier, this is attractive because the credit rating of a major OEM is generally far stronger than that of your own business, often resulting in lower financing costs than if you arranged factoring yourself. The disadvantage is your reliance on the client's initiative: if they do not run a supply chain finance programme, the option is off the table.
Factoring as an independent solution
If you arrange factoring independently, you sell your receivables owed by the major client to a factoring company and receive the bulk of the invoice value immediately. This operates regardless of whether your client participates, making it more flexible than supply chain finance.
It is important to note, however, that some major clients enforce non-assignment clauses (verpandingsverboden) in their procurement terms, meaning invoices issued to that client cannot simply be transferred or pledged to a factoring provider. Always check your contract before pursuing a factoring arrangement, and discuss any restrictions with your client or the factor.
Negotiating the payment terms directly
It may sound obvious, but negotiating payment terms directly is often neglected. When negotiating a new contract or extending an existing framework agreement, there is often more room for manoeuvre than you might assume, particularly if you are a mission-critical or hard-to-replace supplier.
Payment terms are not the only lever: an early payment discount can sometimes prove more effective, granting your client a modest percentage discount if they settle well ahead of standard terms. For the client, this offers an attractive return on surplus cash, while giving you earlier liquidity without relying on an external lender.
- Discuss payment terms explicitly during contract renewals, not merely during initial negotiations
- Offer a modest early payment discount as an alternative to external debt facilities
- Ask large corporate clients about their supply chain finance programmes
- Check purchasing terms for non-assignment clauses before arranging factoring
- Do not switch tactics too erratically: consistent commercial practices build negotiation leverage
Decision framework: which route suits your situation
If your large client already runs a supply chain finance programme, that is typically the cheapest and easiest route, simply because you capitalise on the client's credit rating. If no such programme exists and you have multiple customers with similar payment terms, your own factoring facility is a more robust solution as you avoid dependence on a single customer.
If you primarily experience sporadic peaks in working capital requirements—for instance, surrounding a major project—a temporary increase in your bank overdraft limit may prove simpler and cheaper than setting up a permanent factoring structure.
Worked example: the cost of waiting versus financing
Suppose you issue a € 150,000 invoice to a major OEM with 90-day payment terms. Without financing, you tie up this capital for three months. With factoring at a fee percentage across that term, you receive the majority of the funds within a few days, paying fees that effectively equate to an interest rate over the bridged period.
Always weigh those costs against what it costs you to forgo that cash for three months: does it mean missing out on supplier prompt-payment discounts, drawing on more expensive credit lines, or missing a growth opportunity? These indirect costs frequently exceed direct factoring charges, rationalising the decision to finance.
What to do next
Find out whether your key clients offer a supply chain finance programme and onboard where appropriate. Review procurement terms for non-assignment clauses before organising factoring yourself, and evaluate based on your customer concentration whether factoring, an overdraft, or a blended facility fits best. Explore the possibilities on our page on factoring and working capital, and model your situation with the financing calculator or during an advisory consultation.
Frequently asked questions
- What is the difference between factoring and supply chain finance?
- With factoring, you arrange invoice financing yourself with a factoring company. With supply chain finance, your corporate client establishes the programme, allowing you to benefit from their credit rating, which usually works out cheaper.
- Am I always permitted to sell my invoices to a factoring company?
- Not always. Some large clients include a ban on assignment (verpandingsverbod) in their standard terms of purchase. Review your contract before initiating a factoring process.
- Can I negotiate payment terms directly with a major OEM?
- While this is often tougher than with smaller clients, contract renewals typically offer more leeway than expected, particularly if you are a critical supplier. Offering an early payment discount is sometimes a more effective alternative than insisting on a shorter payment window.