However beautiful the strategy, you should occasionally look at the results- Winston Churchill
People often ask why supplier’s take early payment through supply chain finance in order to determine which suppliers will find supply chain finance most valuable. Usually, people think suppliers take early payment or trade because the supply chain finance program rate is lower than their short-term term debt. This is simply not true. At PrimeRevenue, half of the top 10 trading suppliers by trading volume are large investment grade suppliers who actually have a lower cost of short term debt than the supply chain finance rate. So, why do supplier’s trade? Empirical evidence from our supply chain finance programs over the last 10 years, which includes tens of thousands of suppliers and hundreds of billions of dollars of transactions, shows the reasons why suppliers trade are, in order of importance:
- Materiality of spend. Is the buyer’s spend with the supplier material to their business? This is based both on the percent of revenue that comes from the buyer and the absolute level of spend. The more material the spend, the more likely the supplier is to trade.
- Payment term. The longer the payment term the more likely the supplier is to trade.
- Value of capital. The higher the supplier values capital, the more likely they are to trade.
100% of trading activity is captured by these 3 variables. A supplier with a small percentage of revenue from a given buyer, short payment terms and a very low value of capital won’t be taking early payment through supply chain finance. A supplier with any one of the three characteristics listed above may find supply chain finance attractive and trade invoices for early payment. Materiality of spend and payment term are of course easy to calculate. How a supplier values capital is a far more slippery affair however. I’ll take a look at that in more detail next week.
Published April 11, 2013