Commission Based Financing or CBF for short, is a way for a seller to provide extended payment terms as an incentive for their buyer (another business) based on a commission fee.This allows the buyer to buy now and pay later without additional cost.
How Commission Based Financing Works
As explained previously, CBF allows a seller to offer extended payment terms to their buyer for a commission fee. The commission fee is taken out of the payment by the financing party (Faktorama), when the buyer receives the goods. This allows the seller to get their money right away, while the financing party (Faktorama) waits to collect the payment from the buyer when the set payment term is over.
The buyer enjoys the benefits of buying now and paying later with no additional cost, providing a compelling offer for buyers.
The seller gains the following benefits:
- Getting their money right away minus the small upfront commission fee
- Distinguishing themselves from their competitors
- Relieving the credit risk they would endure by offering extended payment terms
It’s a “Win Win” for both parties!
Commission Based Financing Example
An electronic component distributor is looking for a way to gain additional customers. They know their buyers can have long sales cycles, so they want to be able to extend their payment terms which are currently at NET 30.
The electronic component distributor comes across Faktorama, and they want to use CBF to extend their payment terms to NET 90. A commission fee is established upfront, so that for every order that uses the NET 90 extended payment terms, a small fee goes to Faktorama for the commission of the sale and the coverage of the extended payment terms.
A new buyer sees that the electronic component distributor is offering extended payment terms at no additional cost to the buyer. They apply for the extended payment terms to see if they pass the risk assessment process because they could really use extended payment terms on their purchases of electronic components. The buyer passes risk assessment, and makes a purchase from the seller. The buyer is given a due date of 90 days, and the electronic component distributor is given the money for the order minus the commission fee. Faktorama collects payment from the buyer in 90 days.
Everyone now has their money when they need it most!