We often talk about how iconic brands like Michelin, Conagra and AGCO use supply chain finance to unlock billions in working capital. But what about suppliers? How do they feel about supply chain finance? Our experience indicates that most suppliers achieve financial benefits that are just as positive (and powerful) as the benefits experienced by buyer organizations. From large, investment-grade suppliers to those on the tail end, suppliers of all sizes benefit from being able to get paid early, having better visibility into payment processing, and having access to working capital that can be invested in growing their business.
Every day, companies rely on working capital to pay for strategic initiatives or to provide a cushion during slower economic times. If you’re a large supplier with an investment-grade credit rating, then there’s a good chance you have access to multiple financing options.
But for non-rated and sub-investment grade suppliers, the options aren’t always 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 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. We’re doing our part to make that happen at PrimeRevenue by invoking a diverse multi-funder approach to supply chain finance. Put simply, we have more funders willing to partner with more suppliers (read more about why we’re making the mid-market a priority in 2018).
Back to the benefits. More than 20,000 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 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.
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 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 customer’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 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? Will your provider be able to cover all currencies and jurisdictions? Finally, will your provider work with your suppliers to streamline program participation so they can optimize the benefits to their organization?
Published February 20, 2019