With markets around the globe in flux, all eyes are on the risks to the global economy and a corporate debt load that’s crept up to $9 trillion – much higher than it was during the financial crises of 2001 and 2007, and even the crash of 1929.
In today’s business climate, economic conditions like these may change in an instant – whether due to economic issues around the world or more industry-specific speed bumps. Those changes can have an immediate impact on global supply chains, hitting both suppliers and buyers in unique but equally challenging ways. It also has a major impact on companies being able to fund innovations when they are overleveraged and borrowing is significantly harder to do, particularly for non-rated and non-investment-grade companies during a downturn.
So, how can suppliers and buyers protect themselves from these types of volatile conditions? Supply chain finance (SCF) is a valuable tool that tackles these issues head on. It provides a win-win solution for both buyers and suppliers, empowering them to meet their corporate and strategic objectives. SCF acts as a defensive layer, enabling both suppliers and buyers to optimize their cash flow, providing a means to insulate themselves from a volatile economy. Let’s take a closer look at the benefits to both suppliers and buyers of SCF.
Increased visibility, protection from volatility for suppliers
One of the major benefits suppliers see in SCF programs is increased visibility and certainty around payments from their buyers. Using a centralized platform, suppliers can see when an invoice is approved, when it’s been submitted for payment, and for what amount. That’s especially critical at the end of the year when buyers are more pressured to improve their cash flow, which could potentially result in slower payment approval times. An SCF program gives suppliers confidence in accurately forecasting cash flow and managing working capital requirements.
In addition, SCF provides a defensive layer to help suppliers weather economic turbulence by allowing suppliers to submit invoices to funders for early payment.
That’s particularly important for smaller suppliers with large customers due to the fact that SCF is based on the buyer’s cost of credit instead of the suppliers. As a result, the supplier can be paid early and at a finance rate that is often significantly lower than what the supplier can leverage on its own. This provides suppliers with immediate access to liquidity that can help them keep their business operations functioning normally – no matter the business climate.
In one key example of SCF’s benefits to suppliers, we look to the experience of a large electrical appliance manufacturer. This company had been struggling at the height of the global recession in 2008 as a result of consistently late customer payments. SCF became a lifeline for the manufacturer to stay in business, providing them with the cash flow they needed to weather those challenging recessionary times. In fact, SCF accelerated $25 million in cash flow and helped the company more accurately forecast revenue performance and obstacles.
A low-cost working capital tool for buyers
From the buyer’s perspective, by starting or expanding SCF now, they can see dual benefits – protecting their suppliers and giving them a low-cost working capital tool to manage their own finances, while also starting to generate the cash that will be needed when debt maturities come due.
With suppliers and buyers, there’s always been negotiation around payment terms and buyers have long had a practice of holding back payments. For buyers, this means that all risk and burden of financing gets pushed out into their supply chain. With SCF, buyers are taking an active role in giving their suppliers a financing option to greatly reduce that risk.
When a buyer makes the decision to roll out an SCF program, in most instances, they are hoping to improve their working capital. By holding onto cash longer, buyers can use this cash toward various strategic initiatives or to pay down debt. At the same time, SCF can also provide their suppliers with improved cash flow to use towards their own initiatives.
Weathering future economic storms
Suppliers and buyers can’t control the economic climate, but they can prepare for rough seas. Many suppliers and buyers are seeing the benefits to a SCF approach. Through increased visibility and flexibility, SCF will allow both buyers and suppliers to weather the economic storms – now and in the future.