Valuing the Upside Impact of Supply Chain Finance for Suppliers

One of the untold stories of supply chain finance is how much value it delivers to suppliers. Often, the benefits of supply chain finance are discussed in terms of the company that’s running the program. What many don’t fully understand is the range of benefits that accrue to suppliers, which are often just as powerful and transformative, if not more so.

Every business needs working capital to run its operations. In the current climate, the need for faster, easier access to working capital has become more urgent. Companies are under constant pressure to grow revenue, improve operating margins, reduce risk and innovate – all while tectonic, disruptive shifts are occurring across many industries.

For example, we recently heard the North American CFO of a top-20 auto manufacturer comment on the rapid and massive disruption happening in his industry. He said the rate of change is making it hard to predict what an auto “OEM” will look like in 20 years. This unpredictability is causing a need for unprecedented levels of investment – incrementally $250M to $400M per year – to position the company for relevance in the future. The disruptions include electric vehicles, autonomous driving and ride-sharing programs, among others. While that’s a challenging climate for big auto brands, it’s an even tougher environment for the thousands of suppliers that do business with them.

Supply chain finance exists for two reasons: to improve cash flow for buyers and to improve visibility and cash flow for suppliers. However, I would argue that the cash flow needs of suppliers are more critical in most cases – especially small and mid-size suppliers. Unlike their big, global customers, many have few options for financing. Supply chain finance is a far better alternative at a lower cost, compared to bank lines of credit or traditional factoring programs.

A core challenge in communicating the supplier-focused value of supply chain finance results from the fact that it is often correlated to a payment term extension in the mind of the supplier. It is no secret that companies want to pay slower and collect faster. I get that. If left unmitigated, longer payment terms can be harmful to suppliers’ cash flow. Numerous companies including Boeing, Rio Tinto, Diageo and Walmart have caught flack because of the damage and/or the backlash they’ve created when extending payment terms with suppliers. This doesn’t have to be, and shouldn’t be the case.

Supply chain finance solves this problem. In fact, that’s the whole point.

Let’s say you’re a supplier used to being paid by a customer 45 days after invoicing, and then that customer pushes your payment terms to 90 days. If your customer offers a supply chain finance program, you should now be able to be paid as soon as the invoice is approved. We have buyers using our platform that consistently approve invoices in as little as two days. The nominal percentage transaction fee is a small price to pay for reliable, near-immediate access to working capital that doesn’t count as debt on your balance sheet.

Even if a supplier elects NOT to advance an invoice for early payment they also get visibility into cash flow that is certain. The way our solutions work, suppliers know the date of payment and the amount of the payment. It is a certainty. In the world, outside of supply chain finance, cash flow forecasting is a guessing game.

Here are a few examples of how suppliers trading invoices on PrimeRevenue’s platform are benefiting from supply chain finance:

Funding growth and innovation. Kiddyum, a once-small maker of frozen children’s meals, signed U.K. grocery giant Sainsbury’s as a customer. Kiddyum needed immediate access to working capital to pay for production, warehousing and distribution costs to fulfill increased demand. The solution was Sainsbury’s supply chain finance program offered through PrimeRevenue. It enabled near-immediate payment of invoices, thereby providing Kiddyum the liquidity it needed to invest in growth. Founder Jane Hynes calls it “an absolute lifeline” during a high-growth period.

Weathering economic turbulence. One company, a major supplier to the world’s leading home appliance manufacturers, used PrimeRevenue’s supply chain finance platform to accelerate $25 million in cash flow during the global financial crisis. The company’s CFO says: “In a time of financial catastrophe for many companies, supply chain finance provided us the cash flow we needed to weather recessionary times.”

Lowering the cost of funding. Barry Callebaut is the world’s largest manufacturer of chocolate and cocoa and a $6 billion supplier to companies like Kellogg’s, General Mills and Nestle. By participating in their customers’ supply chain finance programs, they can get paid early and optimize working capital for a nominal transaction fee. From Barry Callebaut’s head of European treasury operations: “Besides adding a lot of value to the business relationship with our customer, it also enables us to accelerate cash flow at a low cost by leveraging the customer’s strong credit rating. And since it is a true sale of receivables, there is no additional financial debt on our balance sheet.”

Here at PrimeRevenue, the numbers speak for themselves. Thousands of suppliers use our platform to accelerate cash flow and improve their working capital positions. This past March more than $7 billion in invoices were traded. Many of these suppliers are small and mid-size businesses. For most, expediting cash flow any other way would be expensive and have a negative impact on the balance sheet.

And supply chain finance – as we do it here at PrimeRevenue – is a true and equal win-win for buyers and suppliers. We’re giving suppliers of all sizes the cash flow improvements they need to be successful in today’s business climate. Let’s not forget that part of the story.