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As a business owner, you have several small business financing options to consider. Among those options is account payables (AP) financing, also known as trade financing. In this guide, we’ll explain what accounts payables financing is and how it works. Then, we’ll lay out the steps to apply for this type of funding.

What is accounts payable (AP) financing?

Accounts payable financing, or AP financing, is a funding process initiated by a company purchasing goods. The buyer selects a third-party financing company that pays a vendor for goods the buyer needs. The buyer pays interest to the financing company for the purchase in order to get more time to pay off the debt. The vendor may also pay a service fee to the financing company and/or agree to a discount on the invoice. This process is also called trade credit, vendor financing, reverse factoring, and supply chain finance (SCF).

The buyer creates a predictable cash outflow while maintaining great vendor relationships. From the vendor or seller's perspective, accounts payable financing is accounts receivable financing with a couple of differences. First, the seller doesn't initiate financing. Second, the seller receives cash from a financing company (usually lenders) chosen by the buyer. Thus, AP financing involves three parties and works differently.

Parties involved in accounts payable financing

Payables finance involves three parties. These are:

  • The buyer: Owes money to the seller
  • The seller: Expects cash from the seller for its invoices
  • The finance provider: Sits between the buyer and the seller, making payables financing possible.

How AP financing works

Accounts payable financing follows a few simple steps.

  • The buyer applies for payables financing and establishes a contract with a financing company.
  • The financing company contacts the seller and gives it an option to receive early payment on its invoices at a discount.
  • Once the seller agrees, the buyer transfers all invoice data to the financing company.
  • The financing company pays the seller at a discount to invoice prices.
  • A while later, the buyer pays the full invoice amount to the financing company, helping the latter earn a profit from the arrangement.

Note that the seller can opt out of the early payment option. In this case, the financing company pays the seller the entire invoice amount on the invoice's due date.

Large companies use the steps above to pay their smaller vendors. Thus, small businesses are often recipients of funds from payables financing programs. If you're dealing with a company roughly the same size as yours, you can use a modified form of payables financing.

For example, let's assume your customer owes you cash on invoices you've sent. You can offer trade or supplier financing with the following steps:

  • Collect cash on a negotiated percentage of the invoice. For instance, your customer can pay 70% of the invoice's value.
  • You collect the remaining amount monthly at a fixed interest rate.

Thus, as a small business owner, you can opt for payables financing to quickly receive cash from large customers or use it to boost cash flow by financing a small or similarly-sized customer. In essence you can create something resembling Buy Now, Pay Later programs.

How accountants handle AP financing

The US Generally Accepted Accounting Practices (GAAP) do not offer guidance on how companies must report payables financing. However, GAAP does specify a few criteria for trade payables to remain as such on a company's balance sheet.

Here are some of them:

  • The buyer must use their payables program to obtain affordable credit and not use it to force suppliers to accept steep discounts.
  • Sellers must always have the option of not opting into the trade payables program.
  • Sellers must negotiate payment discounts and other terms exclusively with the financing company, not the buyer.
  • The seller's invoices must be assigned to the financing company, not the buyer.

Pricewaterhouse Coopers has published guidance on how companies can classify their accounts payable financing on their financial statements. Given their malleable nature, payables financing classification often comes down to what your accountant deems best.

How AP financing is different from other forms of funding

Payables financing is just one of several alternative funding options you have. Here's how it differs from some of them.

Accounts payable financing vs. receivables financing

While the payables financing cycle resembles receivables financing from the seller's perspective, the differences lie in the details.

  • Payables financing is initiated by the buyer while receivables financing is initiated by the seller.
  • A seller can opt out of a payables financing program and collect full payment. When opting for receivables financing, the seller has to always accept a discount.
  • Payables financing involves three parties, while receivables financing involves two.

Accounts payable financing vs. invoice financing

Accounts payable financing is a specific form of business financing, while invoice financing refers to several methods. Invoice financing includes financing techniques such as:

  • Invoice discounting: Sellers offer buyers a discount to incentivize early payments.
  • Invoice factoring: A form of receivables financing where sellers accept discounts on invoices from a financing company.
  • Spot factoring: Similar to invoice factoring but applies to selected invoices instead of all of the seller's receivables.

Accounts payable financing vs. forfaiting

Forfaiting is another term for receivables financing, while payables financing refers to a buyer using a financing company to smooth its cash outflows. Forfaiting often occurs in the import-export business.

Like receivables financing, an exporter sells its receivables at a discount to a financing firm (a forfaiter). The forfaiter collects cash on the outstanding invoices. Forfaiting helps exporters avoid situations where importers default on payments.

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The pros and cons of AP financing

Payables financing offers advantages, but there are some cons you should be aware of too.


  • Discreet financing: Payables financing is a discreet way for buyers to smooth their cash outflows. Other financing methods like bank debt or debt restructuring require them to disclose the extent of their short-term debt.
  • Predictable cash outflows for buyers: Payables financing ensures a company's suppliers get paid on time while creating predictable cash outflows for the buyer. Working capital projection is also simpler.
  • Quick cash collection for the seller: Sellers get paid well before invoice due dates if they wish or can collect the full amount on the due date.
  • Supply chain stability: Buyers form strong supplier relationships thanks to the latter getting paid on time or before due dates. The result is a strong and stable supply chain.


  • Exposes financing companies to credit risk: Payables financing is risky for financing companies. The tripartite nature of payables financing creates more damage when a buyer defaults compared to other financing methods.
  • Potential for power imbalance: A large buyer might force suppliers to accept steep discounts or refuse to conduct business. This situation leaves sellers with very little recourse.
  • Accounting uncertainty: Payables financing is tricky from an accounting perspective. Investors might struggle to decipher a buyer's financials, leading to the risk of capital loss.

How to apply for AP financing

Typically, payables financing makes sense for large businesses. However, you can apply for AP financing if the move makes sense from a cash flow perspective. Here's how you can apply.

Evaluate the state of your business

The first step you must take is evaluating your business' current condition. Are there easier financing options you can choose? For instance, payables financing should not be your first choice if you need a quick cash injection.

If payables financing makes sense, look at the checklist below to ensure you'll qualify:

  • Is your business profitable?
  • Is your minimum monthly revenue greater than $700,000? (Some financing companies look for revenues as high as $3,000,000.)
  • Is your business’ credit rating and score in good shape? Finance providers will assess your creditworthiness.
  • Are you in a high-risk industry like cash advances or gambling? You might struggle to qualify for payables financing.
  • Are your vendors based in your country or abroad? Some financing firms do not handle international payments to suppliers.
  • Do you have at least five suppliers with regular monthly transactions? Financing firms prefer a minimum monthly transaction level.

Assess financing firms

Once you've reviewed your business' financial position, begin evaluating financing firms. Every firm has different requirements and offers, so review them thoroughly. If your suppliers are based abroad, check payment and transaction minimum requirements.

Negotiate terms

You can and should negotiate payment terms with financing companies. Remember that your suppliers will depend on the financing firm to receive payments. Inquire what discount levels the financing firm seeks and whether those terms will be acceptable to your suppliers.

Note that you can’t legally ask financing firms for specific discount levels.

Determine program structure

Once you've chosen a financing firm, sign all relevant contracts and notify your suppliers. Note that some suppliers might choose to deal with you directly, not the financing firm.

3 accounts payables financing best practices

Here are some accounts payable financing best practices.

Check whether you need it

AP financing will suit businesses that experience the following situations:

  • Want to smooth their cash outflows and make the predictable
  • Have substantial transaction volumes
  • Have a good-sized roster of suppliers and vendors
  • Have relatively predictable supplier payments every month

If your business doesn't experience the above, choose another financing option. Payables financing can become cumbersome if your business is unsuited to it.

Choose financing carefully

AP financing creates strong vendor relationships when executed well. Respect your vendors' choice to not take part, and make sure you choose a reputable financing company. Poor financing company liquidity can ruin vendor relationships by delaying payments or demanding steep discounts.

Measure program effectiveness

Always measure how well your payables financing program is working. Some metrics you can use are:

  • Budget planning efficiency
  • Cash flow projection ease
  • Time to monthly close—easier payment workflows should lead to shorter monthly closes

Accounts payable financing is a great way of smoothing cash outflows and building great relationships with your vendors. Remember to implement it only if the method suits you and your vendors are on board.

Access AP financing with Ramp

Ramp is a spend management and finance automation platform geared towards supporting startups and businesses of all sizes in reaching their goals.

With our AP financing, you can pay vendors later so that you have the cash on hand to reinvest into your business. Our fee structure is simple, and you'll only pay for what you use. We'll even prorate your fee if you pay early.

Explore Ramp's flexible working capital solutions to smooth out your company's cash flow.

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Finance Writer and Editor, Ramp
Ali Mercieca is a Finance Writer and Content Editor at Ramp. Prior to Ramp, she worked with Robinhood on the editorial strategy for their financial literacy articles and with Nearside, an online banking platform, overseeing their banking and finance blog. Ali holds a B.A. in Psychology and Philosophy from York University and can be found writing about editorial content strategy and SEO on her Substack.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.


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