Supplier Incentives?

The Association of Corporate Treasurers recently published a summary of their most recent breakfast update. At the breakfast, it was agreed that one of the main buyer benefits of supply chain finance is “a good incentive to get suppliers to agree to extended payment terms, which then improves the buyer’s working capital.”

On the same day the breakfast was held, Euromoney published an article titled Supply Chain Finance Still Viewed With Caution Among SMEs. These two trains of thought are, of course, connected.

With or without supply chain finance, large corporates are focused on driving free cash flow through working capital improvements and extending supplier payment terms is one way to accomplish this objective.

For companies looking to extend payment terms, the third party funded supply chain finance is an excellent support tool. It mitigates the negative economics of the supplier by completely eliminating any cash flow impact and partially or completely mitigating the cost impact.

That said, supply chain finance should not be traded for extended payment terms. For many reasons, this approach will hurt the term extension initiative. Payment terms are part of the commercial arrangement between buyer and supplier and should be negotiated on that basis, not traded for financing.