Why Supply Chain Finance is a Win-Win for Buyers and Suppliers – Especially During Economic Uncertainty
By 4 minute read• Published February 20, 2019 •
We often talk about how buyers use supply chain finance to unlock billions in working capital. But what about suppliers? How do they feel about supply chain finance? And how can supply chain finance help them traverse economic uncertainty?
Our experience indicates that most suppliers achieve financial benefits that are just as positive (and powerful) as the benefits experienced by buyer organizations. Suppliers of all sizes benefit from early payment, having better visibility into payment processing, and access to working capital that can help them navigate economic stress and/or invest in growing their business.
Every day, companies rely on working capital to pay for strategic initiatives or to provide a cushion during challenging economic times. If you’re a large supplier with an investment-grade credit rating, you may already have access to multiple financing options (although these options may be fewer if the market dictates a tougher lending environment).
But for non-rated and sub-investment grade suppliers, the options aren’t as plentiful or attractive. The cost of funds in a traditional commercial lending scenario can be punitively high for these businesses, if available at all.
Historically, supply chain finance hasn’t been an option for smaller suppliers because bank-led programs are engineered to serve investment-grade program participants.
Fortunately, this is changing. Today, non-investment grade and tail-end suppliers have access to the benefits of supply chain finance. PrimeRevenue’s diverse multi-funder approach to supply chain finance means we have more funders willing to partner with a broader range of suppliers.
More than 30,000 suppliers use PrimeRevenue’s supply chain finance platform to accelerate cash flow. But that’s just the beginning. These suppliers are ultimately preparing for a more secure future. Here’s how supply chain finance makes that happen:
It makes it easier to weather economic turbulence. Rather than waiting on its large customers to pay invoices (often overdue), the supplier can submit invoices to funders for early payment. In turn, this provides immediate access to liquidity that can help the supplier keep operating in a “business as usual” environment in any business climate.
It funds growth and innovation. Suppliers need to have the working capital available to respond to increased demand for their offerings and to invest in innovations that will give them a competitive advantage. This may seem counterintuitive in a downturn, but this is also the time for companies to hunker down and strategize how they can compete and grow in a rapidly changing market.
It provides funding at a much lower cost. The interest rate a supplier will pay for a loan or factoring will most likely be much higher (often 10x or more) than the discount/processing fee paid using a supply chain finance program, which is tied to the buyers’s credit rating rather than the supplier’s. Furthermore, while a loan can negatively impact the supplier’s debt-to-equity ratio and other metrics, supply chain finance is a true sale of receivables and has no negative effect on the supplier’s balance sheet.
Finally, a word to buyers. As mentioned earlier, you’re probably aware of how supply chain finance can benefit your organization. But it’s important to apply a supplier perspective to your supply chain finance decisions. How will your provider make sure you can expand your program beyond your largest suppliers? Can your provider cover all currencies and jurisdictions? Finally, will your provider work with your suppliers to streamline program participation so they can optimize the full benefits of early payment? Remember – supplier participation (and therefore program success) is directly tied to supplier satisfaction.