Lien On This

Man will occasionally stumble over the truth, but most of the time he will pick himself up and continue on. – Winston Churchill

Interesting piece in April’s CFO magazine on AB Inbev extending supplier payment terms, Lien on Me. The description of suppliers finance AB Inbev’s extended payment terms is Exhibit 1 for how Supply Chain Finance can reduce costs and improve the financial health of the supply chain. Most of the solutions discussed (eg Asset Based Lending, Factoring, etc.) are both economically painful and administratively burdensome, yet suppliers are happy to have them. Some of the administrative processes described seem downright draconian. With Supply Chain Finance, the financing rates are dramatically lower than the options discussed. Also, with SCF there are no additional fees such as those mentioned in the article, e.g. facility fees, collateral monitoring fees or field examination fees. The only cost to suppliers is the financing fee which is provided at an annual interest rate based on the credit rating of the buyer. For an investment grade buyer like AB Inbev the rate would be about 1.5% APR to 3% APR which translates into about 0.12% to 0.25% of invoice value for an invoice paid 30 days early. That’s 70% – 90% cheaper than the solutions described in the article. In addition, with SCF the supplier can access funds on demand over the web with no additional administrative burdens of the type described in the article such as reporting requirements, loss of negotiating flexibility with customers, etc. Plus SCF advances 100% of the funds, there is no 20%+ holdback and there is no recourse back to the supplier. If the buyer does not pay, the supplier still gets to keep the funds. All in all, Supply Chain Finance is a much cheaper and easier receivables based finance solution IF an organization has customers that offer SCF. Therein lies the rub, the buying organization needs to offer it. For suppliers like those mentioned in the article, hopefully AB Inbev will join the likes of Kohl’s and Wal-Mart in offering SCF to suppliers.