Of the misperceptions surrounding supply chain finance, one of the most common is that it’s reserved for large, publicly traded or investment grade companies. That’s not true – or at least not anymore.
When choosing a supply chain finance provider, companies have historically been limited to either relationship banks or fintechs with limited liquidity sources. These providers take a very conservative approach by primarily targeting investment grade companies and maintaining a low risk tolerance for creditworthiness. This has been particularly true during recent global economic disruptions that prompted many banks to further tighten credit lines and reduce their risk tolerance. As a result, the middle market, which is mostly made up of private equity (PE) owned or non-investment grade companies, has effectively been dismissed from supply chain finance.
The implications of not having equal access to supply chain finance have been made even more obvious amid a volatile business climate. Widespread liquidity crunches, fluctuations in demand, and transformation acceleration have resulted in many mid-market companies (and their suppliers) facing even greater cash flow challenges than their larger or higher-rated peers. This presents a Catch-22 in many respects. As traditional lending options have become more scarce or unattractive, more mid-market companies have become interested in supply chain finance, which unlocks millions of dollars in working capital trapped in the supply chain. This is capital that can be used to keep pace with transformation, inject agility into the supply chain, fund profitable growth, or reduce debt.
Case in point: After realizing firsthand the benefits of supply chain finance as a supplier, one mid-market manufacturer decided it wanted to provide those same benefits to its suppliers through implementing its own program. However, most funders had little to no appetite for the middle market at the time. PrimeRevenue changed that by broadening the pool of funders the manufacturer had access to, and the multi-funder model allowed multiple funders to participate in the supply chain finance program.
Over the past several years, the supply chain finance landscape has evolved significantly, especially regarding funding opportunities. Not only are PE-backed and non-investment grade companies becoming increasingly interested in supply chain finance (especially now as disruption gives way to recovery), but both traditional and non-traditional funders’ credit appetite for this sector and high performing assets have increased as well. This has opened additional funding opportunities for mid-market companies—and for third party providers like PrimeRevenue.
PrimeRevenue has onboarded numerous funding partners that are interested in providing liquidity for companies that are non-investment grade with an annual revenue between $100 million and $2 billion. Since we don’t rely on syndication or a single source of funding, we are able to leverage our growing network of 100+ funding partners to source liquidity for enterprises as well as middle market companies. Our funding network ranges from large, multinational banks to non-traditional funders like regional banks, insurers and capital markets that have a more diverse appetite for risk and are subject to fewer regulatory constraints.
Aside from the obvious cash flow benefits, middle market companies have found other positive impacts of supply chain finance. In addition to funding strategic growth and innovation initiatives, some of our clients are using supply chain finance to pay down debt and actually improve their credit rating. One client, a PE-backed global caffeinated beverage company, was non-investment grade prior to partnering with us. Through a PrimeRevenue-led supply chain finance program, the company generated enough free cash flow to pay off 15 percent of its debt. This was instrumental in S&P’s decision to upgrade the company’s rating a total of three times in a single year. As a result, the interest cost across all of their remaining debt was reduced, which saved the company millions of dollars every year, and the company was upgraded to investment grade.
If you’re interested in supply chain finance—whether to emerge from disruption, fund your next strategic initiative, or improve your corporate credit rating—but aren’t sure it’s a viable option, I encourage you to explore your options. There are significant opportunities for mid-market companies to accelerate cash flow and experience the benefits of improved working capital.