How to Pay Suppliers Until My Customers Pay Their Invoices
TL;DR
Most B2B businesses pay suppliers weeks or months before customers settle their invoices, creating a cash conversion cycle gap that strains working capital. Five financing tools bridge this gap: purchase order financing, invoice factoring, supply chain finance, business lines of credit, and asset-based lending. The right choice depends on where in the order-to-cash timeline your cash gets stuck. Often, combining two or more tools produces the best result.
You shipped the product. Your supplier wants payment now. Your customer won’t pay for 45 days. Maybe 60. Maybe longer.
This timing mismatch is the single most common cash flow problem in B2B commerce, and it has nothing to do with profitability. Profitable businesses run out of cash all the time because they must pay for goods before they collect revenue from selling them.
If you’re trying to figure out how to pay suppliers until your customers pay their invoices, you’re dealing with a structural problem that has well-established solutions. This guide walks through every major financing tool available to Canadian businesses, explains when each one fits, and shows how to combine them for maximum effect.
Start a financing enquiry to explore which option fits your cash cycle.
The Cash Conversion Cycle: Why This Gap Exists
The formal name for the supplier-to-customer timing gap is the cash conversion cycle (CCC). It measures the number of days between when your business pays cash out to suppliers and when it collects cash from customers.
The formula is straightforward:
CCC = Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding
A positive CCC means your business is a net user of working capital. You’re funding the gap out of pocket, from savings, or through financing. Almost every product-based business has a positive CCC.
How big is the gap in practice? Globally, companies averaged 61.8 days CCC in 2023. For a manufacturer doing $15 million in annual revenue, that translates to roughly $3.37 million in working capital tied up at any given time.
Canadian businesses face an especially sharp version of this problem. According to the Canadian Federation of Independent Business, 74% of Canadian SMEs have experienced late payments from customers. The average Canadian small business waits 52 days to receive payment on invoices, and nearly 60% of invoices are paid late. About 30% of small businesses report active cash flow problems due to late payments, carrying an average of $15,000 in outstanding invoices at any given time.
For more on how the cash conversion cycle shapes your financing needs, see our working capital guide.
The takeaway is simple: if you need to pay suppliers before customers pay you, you’re not doing something wrong. You’re running a normal business. The question is how you fund the gap.
Five Financing Tools That Bridge the Gap
Each tool below maps to a different point on the order-to-cash timeline. Understanding where your cash gets stuck determines which tool fits.
Customer PO → Pay Supplier → Ship Goods → Invoice Customer → Customer Pays
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PO Finance PO Finance Factoring Factoring Cash in hand
begins here continues
No other guide maps financing tools to this timeline, but it’s the clearest way to think about the problem. Let’s walk through each one.
1. Purchase Order (PO) Financing
What it is: A finance company provides funds directly to your supplier so they can produce and deliver goods against a confirmed customer purchase order. You don’t need to front the cash yourself.
How it works: You receive a purchase order from your customer. You share that PO with a PO financing provider, who pays your supplier (sometimes up to 100% of the supplier cost). Once goods are delivered and your customer pays, the financing provider takes their fee and you keep the rest.
Who it suits: Importers, wholesalers, and distributors who receive large orders they can’t fund from existing cash. It works only for tangible goods, not services.
What it costs: Fees typically range from 1.5% to 6% per 30-day period. That sounds modest, but it compounds quickly. On a $50,000 supplier payment at a 3% monthly rate, you’d pay $1,500 if your customer pays in 30 days, but $3,000 if they take 60 days. Annualized, PO financing fees of 1.8% to 6% per month translate to effective APRs of 20% to 80% or higher.
Key qualification note: PO financing providers evaluate your customer’s creditworthiness, not yours. If your buyer is a strong credit (a major retailer, a government entity, a large corporation), approval is much easier regardless of your own balance sheet.
Pros: Covers up to 100% of supplier cost. Gets you through large orders without depleting cash. Approval is based on customer credit.
Cons: Expensive if customers pay slowly. Limited to physical goods with confirmed orders.
2. Invoice Factoring (Accounts Receivable Financing)
What it is: After you’ve delivered goods or services and issued an invoice, you sell that unpaid invoice to a third party (the “factor”) for immediate cash.
How it works: The factor advances you 70% to 90% of the invoice value upfront, often within 24 hours. When your customer pays the invoice at its normal due date, the factor deducts their fee and sends you the remaining balance.
Who it suits: Any B2B business with invoiced receivables. Invoice factoring is particularly common in manufacturing, distribution, transportation, construction, and healthcare, industries where payment cycles are long and the mismatch between supplier payments and customer collections is severe.
What it costs: Fees range from 1% to 5% of the invoice value per 30-day period. Factoring is generally cheaper than PO financing because the risk is lower: the goods have already been delivered and an invoice exists.
Recourse vs. non-recourse: With recourse factoring, you’re responsible for buying back invoices the factor can’t collect. With non-recourse factoring, the factor absorbs the loss if your customer goes insolvent. Non-recourse costs more but eliminates your bad-debt exposure.
Pros: Fast funding. Based on customer credit. Scales with your sales volume.
Cons: Your customers may be contacted by the factor. Reduces margin on each transaction.
3. Supply Chain Finance (Reverse Factoring)
What it is: A buyer-initiated financing arrangement where a financial institution pays suppliers early (at a discount), and the buyer repays the institution on extended terms.
How it works: Unlike traditional factoring, reverse factoring is started by the buyer, not the supplier. The buyer’s bank agrees to pay the supplier’s invoices early. The supplier gets cash faster; the buyer gets more time to pay.
Who it suits: Larger buyers with established supplier networks and strong banking relationships. If you’re a supplier, you benefit only if your buyer has set up a supply chain finance program.
The SME challenge: Banks find it difficult to enter reverse factoring agreements with small businesses. Smaller companies are often perceived as higher risk, and the setup complexity requires dedicated treasury infrastructure that most SMEs lack.
Pros: Suppliers get paid early. Buyers extend their own payment terms without damaging supplier relationships.
Cons: Requires the buyer’s bank to participate. Hard for small businesses to initiate. Complex to set up.
4. Business Line of Credit
What it is: A flexible facility that lets you borrow, repay, and reborrow funds as needed, paying interest only on the amount currently drawn.
Who it suits: Businesses with strong credit history, adequate collateral, and a need for ongoing working capital flexibility. According to the Federal Reserve Banks’ 2023 Small Business Credit Survey, 43% of small businesses who applied for financing sought a line of credit.
What it costs: Bank credit lines carry median rates between 6.5% and 7.9% APR, dramatically cheaper than PO financing or factoring when annualized. But qualifying is harder and the process is slower.
For a deeper look at whether a bank line of credit or factoring better fits your situation, see our comparison on when factoring beats a bank line.
Pros: Cheapest per-dollar option. Reusable. Maximum flexibility.
Cons: Bank underwriting is slow. Often requires collateral, personal guarantees, and financial covenants. Many growing businesses get declined, especially those with short operating histories.
If your bank has said no, that doesn’t necessarily mean your business is unfundable. It often means you need a different structure. Our guide on financing after a bank decline walks through what to do next.
5. Asset-Based Lending (ABL)
What it is: A revolving credit facility secured against your business assets, typically receivables, inventory, and equipment.
Who it suits: Mid-market companies with diverse collateral pools that need larger borrowing capacity than unsecured options provide.
How it differs from factoring: With ABL, you retain control of collections. The lender takes a security interest in your assets but doesn’t step into the customer relationship the way a factor does. Borrowing availability fluctuates with your collateral base.
Pros: Higher borrowing limits. Revolving structure. You manage your own receivables.
Cons: More complex reporting requirements (borrowing base certificates, field audits). Minimum size thresholds often exclude very small businesses.
For companies that also need equipment financing, ABL facilities can sometimes be structured to include equipment alongside receivables and inventory.
Combining Facilities: The Layered Approach
Here’s something most guides miss entirely: you don’t have to pick just one tool.
A company can use PO financing to pay suppliers and fulfill an order, then roll into invoice factoring once goods are delivered and an invoice exists. The PO financing provider gets repaid from the factoring advance, and the business generates working capital before the customer has even paid.
Why does this matter? Because PO financing is the most expensive phase (the risk is highest before delivery). The moment goods ship and an invoice is created, factoring becomes available at lower cost. By stacking PO financing for the short, pre-delivery window and factoring for the longer, post-delivery collection period, you reduce total financing cost.
Practitioners on finance forums describe this as the “PO-to-factor roll,” and it’s particularly effective for importers and distributors who deal with long lead times on the supply side and 30-to-60-day payment terms on the customer side.
When the situation calls for it, you can layer additional facilities on top: equipment leasing, ABL revolvers, or term loans. But designing these multi-facility structures requires someone who understands how lender covenants interact and which providers will work alongside each other.
Submit a loan enquiry to discuss how a layered facility might work for your business.
Before You Finance: Operational Fixes That Free Cash
Financing costs money. Before committing to any facility, tighten your own operations. Most small and growing businesses can reduce their cash conversion cycle by 15 to 25 days within 90 days with focused attention. Here are the highest-impact moves.
Invoice immediately. Every day between delivery and invoicing is a free loan to your customer. Send invoices the same day goods ship or services are completed.
Tighten payment terms. If you’re offering Net 60, move to Net 30. If customers resist, at least enforce the terms you have. Late-payment penalties, even modest ones, change behavior.
Be cautious with early-payment discounts. The common “2/10 Net 30” discount (2% off if the customer pays within 10 days) sounds small. But the effective interest rate implied by that discount is approximately 36% per annum. That’s as expensive as some PO financing. Only offer early-payment discounts if you’ve calculated the true cost.
Automate collections. Automated reminders at 7, 14, and 30 days past due recover cash faster than manual follow-up. Most accounting software supports this.
Negotiate supplier terms carefully. Extending payables is the fastest fix on paper, but stretching suppliers beyond agreed terms risks losing supply and early-payment discounts. Negotiate longer terms formally rather than simply paying late.
Optimize inventory. Every dollar sitting in slow-moving inventory is cash you can’t use. Regular inventory reviews and tighter reorder points free up working capital without any financing cost.
For more strategies, our guide on boosting cash flow for Canadian businesses covers additional tactics.
How to Choose the Right Financing Tool
The decision comes down to one question: where in the order-to-cash cycle is your cash stuck?
| Scenario | Best Tool | Why |
|---|---|---|
| You have a confirmed order but can’t afford to pay the supplier | PO Financing | Funds the pre-delivery gap based on customer credit |
| You’ve delivered goods and have unpaid invoices | Invoice Factoring | Converts receivables to cash in 24-48 hours |
| Your buyer wants to pay you early through their bank | Supply Chain Finance | Buyer-initiated, lowest cost for the supplier |
| You need ongoing flexible access to working capital | Line of Credit | Cheapest option if you qualify |
| You have receivables, inventory, and equipment to pledge | Asset-Based Lending | Higher limits, revolving structure |
| You have both a pre-delivery and post-delivery cash gap | PO Financing + Factoring | Layered approach minimizes cost at each stage |
Consider margin impact. Can your deal absorb 1.5% to 6% monthly financing cost? On a 15% gross margin product, a 3% monthly PO financing fee on a 60-day cycle eats 6 percentage points. On a 40% margin product, the same cost is manageable. Always run the numbers before committing.
Customer creditworthiness matters more than yours. Both PO financing and factoring rely on your customer’s ability to pay. If you’re selling to creditworthy buyers, your approval odds increase significantly, even if your own business is young or recently declined by a bank.
Working with a financing intermediary helps. Practitioners on industry forums note that most business owners approach PO financing the way they’d approach a bank loan: research one lender, apply, wait, then try another if the terms don’t work. This sequential approach wastes time and often produces worse terms. An intermediary who shops multiple specialized lenders simultaneously can find better pricing, faster timelines, and structures that a single lender wouldn’t offer on their own.
For a broader look at how these tools fit into your overall financing picture, our cash flow financing guide covers the full range of options.
The Bottom Line
Figuring out how to pay suppliers until your customers pay their invoices is not a sign of financial weakness. It’s a structural reality of B2B commerce. The cash conversion cycle affects every product-based business, and the financing industry has built specific tools to address every stage of the gap.
Start by tightening your operations: invoice faster, collect harder, manage inventory leaner. Then evaluate which financing tool (or combination) fits your position in the order-to-cash timeline. PO financing handles the pre-delivery gap. Factoring handles the post-delivery gap. Lines of credit and ABL provide ongoing flexibility. And layering multiple facilities together often produces the best economic outcome.
The key is matching the right tool to the right problem, and not overpaying for financing that doesn’t fit your cycle.
Talk to a financing specialist about structuring working capital for your business.
Frequently Asked Questions
What is the cheapest way to pay suppliers before my customers pay?
A business line of credit is the cheapest option, with bank rates typically between 6.5% and 7.9% APR. However, qualifying requires strong credit history, collateral, and a track record. If you can’t get a bank line, invoice factoring is generally cheaper than PO financing because it carries less risk for the lender.
Can I use PO financing and invoice factoring together?
Yes. Many businesses use PO financing to pay suppliers before delivery, then factor the resulting invoice after delivery to repay the PO lender. This layered approach reduces total cost by minimizing time spent in the more expensive PO financing phase.
How quickly can I get funding from invoice factoring?
Most factoring providers fund within 24 to 48 hours once the facility is set up. Initial setup takes longer (typically one to two weeks for due diligence and documentation), but once active, funding against new invoices is fast.
Will my customers know I’m using factoring or PO financing?
With factoring, usually yes. The factor typically contacts your customers to verify invoices and collect payments. Some providers offer “confidential” factoring where your business name stays on communications, but this isn’t always available. With PO financing, the arrangement is primarily between the financier and your supplier, so customer visibility is minimal.
What if my business was declined by a bank for a line of credit?
A bank decline doesn’t mean you can’t access working capital. Factoring, PO financing, and ABL all use different underwriting criteria, focusing on your customers’ creditworthiness and your asset base rather than your business’s financial statements alone. Working with a financing intermediary can help identify which non-bank options fit.
How much does PO financing really cost on an annualized basis?
PO financing fees of 1.5% to 6% per month translate to effective annual rates of roughly 20% to 80%. The actual cost depends on how quickly your customer pays. If they pay in 30 days, you pay one month’s fee. If they take 90 days, you pay three months’ fees on the same principal.
Is supply chain finance available to small businesses in Canada?
It’s difficult. Supply chain finance (reverse factoring) is buyer-initiated and requires the buyer’s bank to set up the program. Most banks find it challenging to offer this to small businesses due to perceived risk and setup costs. SMEs are more likely to benefit from PO financing or factoring as alternatives.
How do I know if my margins can absorb financing costs?
Calculate the total financing fee as a percentage of the transaction’s gross profit, not revenue. If a $100,000 order has a 25% gross margin ($25,000 profit) and financing costs $4,500 (3% monthly for 45 days), that’s 18% of your gross profit going to financing. Decide whether the remaining margin justifies taking the order.