Of the misperceptions surrounding supply chain finance (there are admittedly several), 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. The middle market, which is mostly made up of private equity (PE) owned, non-rated or non-investment grade companies, has effectively been dismissed from supply chain finance.
Despite the fact that many of these companies face even greater cash flow challenges than their larger or higher-rated peers, mid-market companies have historically been underserved by providers of supply chain finance. This presents a Catch-22 in many respects. As high debt/equity ratios and unattractive finance rates make traditional commercial lending less than ideal, more of these companies have become interested in supply chain finance, which unlocks millions of dollars in working capital trapped in the supply chain to fund profitable growth and reduce debt.
Case in point: After realizing firsthand the benefits of supply chain finance as a supplier, mid-market manufacturer Electrical Components International (ECI) 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 ECI 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, non-rated and non-investment grade companies becoming increasingly interested in supply chain finance, but both traditional and non-traditional funders’ credit appetite for this sector and high performing asset have increased as well. This has opened additional funding opportunities for mid-market companies—and for third party providers like PrimeRevenue.
During this time, PrimeRevenue has onboarded numerous funding partners interested in providing liquidity for supply chain finance programs run by companies that are unrated or with a credit rating of BB+ or lower, and have an annual revenue between $100 million and $2 billion. Since we don’t rely on syndication or a single source of funding for direct liquidity, we are able to work with our growing network of 100+ funding partners to source funding for investment grade as well as non-rated and non-investment grade programs, like ECI. 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.
Companies have found other benefits to supply chain finance as well. 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 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.