Supply Chain Funding
Background
Funding the supply chain has traditionally been a battle between you, the small to medium sized buyer, and your suppliers and subcontractors with regards to payment terms. If your payment terms are increased, you release additional cash into your company and this allows you to meet other “more critical” business expenses. However, your suppliers and subcontractors lose exactly the same amount of cash from their businesses and vice versa. This is a lose-lose situation. If you, the buyer, feel that you are in a stronger position, you may feel that you are obtaining “free” financing from your suppliers since you won the battle over the extension of your payment terms with them.
In reality, you are probably on the losing side of the war. Your suppliers will adjust their prices upward in order to compensate for the cost of additional financing they must now provide to you. In this sense, the traditional supply chain is sub-optimal from a financing perspective and both sides are paying an unnecessary price for this.
An arbitrage exists between the cost of capital for you, the small to medium sized buyer, your suppliers and that of a finance company. Neither you nor your suppliers are in the business of providing financing and therefore the financing of the supply chain is sub-optimal when one of you is providing it. The finance company, on the other hand is able to provide financing at a lower cost than both you and your suppliers due to its size and still generate a reasonable return on equity.
With supply chain funding both you and your suppliers are able to free up cash.
How It Works
This is how supply chain funding works: Your supplier sends in an invoice to you. You approve the invoice. Your supplier sells the invoice to a finance company at a rate based on a number of variables including your risk of non-payment. For example, if your suppliers currently offer you 60-day terms, it is possible for your suppliers to receive payment on day 5 at a certain cost while you can pay the finance company on day 60. Given the large benefits to your supplier and the lower cost of financing, a potential credit extension of 10-20 days is fully compensated by the program. This helps you obtain even better credit terms.
The Benefits
- Reduce your suppliers’ cost of doing business with you by improving their cash flow.
- Increase your ability to procure lower cost financing for suppliers particularly with a high cost of capital. This is done by obtaining discounts from your suppliers in return for prompt payment.
- Strengthen your relationships with your strategic suppliers by becoming a low cost buyer.
- Extend payment terms, increase your days payables outstanding (DPO). This releases even more cash into your business.
- Use the extra cash flow to fund renovation, expansion, share buybacks or other operating expenses
- Reduce your accounts payables inquiries, disputes and check processing costs.
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Topics
Global trade is extremely dynamic. The risks are large, the rules are complex and the rewards are great.
A cash gap is created when a company pays its suppliers and subcontractors before it gets paid by its customers.
Funding the supply chain has traditionally been a battle between you, the small to medium sized buyer, and your suppliers and subcontractors with regards to payment terms.
A common question many companies selling overseas ask is: "Will our company get paid?"
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