Supplier financing, which is simply the conversion of invoices to cash in advance of the due date, is a juggernaut globally.
In fact, industry experts peg supplier financing as over a trillion dollar industry worldwide, and it’s still growing. With the convergence of the credit crunch, technology and regulatory changes, supplier financing is becoming increasingly popular because it’s an easy and cost-effective way to get money when a business needs it.
Supplier financing delivers significant benefits for suppliers. It can provide much-needed cash – up to 100% of the face value of the receivable – in advance of the due date and as fast as same day. This cash can be critical in financing unexpected events, facilitating expansion or helping businesses maneuver through seasonal needs. And it can also help suppliers sell more products by accepting (or offering) longer payment terms or eliminating sales caps due to credit exposure to their customers.
Supplier financing is not only beneficial to the supplier, it is beneficial to the buyer as well. Supplier financing advantages both parties which portend more growth in an already sizeable industry.
Despite its already impressive growth, the potential for further expansion in the market as more buyers and suppliers come to realize the mutual benefits of supplier finance is significant. As the solution matures, the business case is becoming much clearer and the misconceptions around it are being dispelled.
Buyer Benefits
As a supplier, you may be asking, how is this beneficial to the buyer and what are the misconceptions?
One misconception Hite is likely referring to is the belief some suppliers have that working with a supplier finance-such as receivables financing or factoring-could potentially threaten their relationship with buyers. When a supplier contacts a buyer indicating their intention to sell receivables in exchange for early payment from a third party, the concern is the buyer will see them as being on a weak financial footing. The fears then extend to perceptions of the supplier’s viability. Do they have cash flow issues? Will they be able to fulfill their next order? The concerns are unfounded. The reality is, in fact, the exact opposite.
Buyers experience significant benefit from supplier finance. First of all, many buyers offer supplier finance to their supply chain (albeit often to only the largest 100-200 suppliers). Second, many corporates are happy to have their supplier partners use it because supplier finance helps secure, not weaken, their supply chain. With more working capital on hand, larger orders can be fulfilled. And, as buyers inevitably extend payment terms to align with their peers, they can do so safe in the knowledge that their supply chain has access to ample, well-priced options to accelerate payments. In that, it’s a win-win for both parties.
A 2014 story in Treasury Today broke down the advantages supplier finance offers both the buyer and the supplier:
Mitigates the impact of the payment term extension
Mitigates supply chain risk
Provides tangible support of suppliers thus fulfilling Corporate Social Responsibility (CSR) objectives
Enables early settlement of receivables to reduce Days Sales Outstanding
Offers more predictable cash flow and supports greater control and visibility over-payments
Offers non-recourse cash at a competitive finance cost
Another common misconception is that suppliers have to use the program currently offered by their buyer. That is not the case. In fact, many Supply Chain Finance programs are only offered to the top suppliers. And the other forms of financing programs offered to the rest of the supplier base are optional. Supplier financing is compatible with most buyer-centric programs and helps buyers address a need for the entire supplier base.
Supplier financing options are changing the way suppliers and buyers interact – and it’s for the better. It delivers benefits for both parties. It allows the suppliers to get the money they’re owed sooner, enabling them to apply it toward business needs right away. For buyers, it means greater financial flexibility, a stronger supply chain and lower end-to-end costs. And it does it all without negatively impacting anyone’s balance sheet.
A win-win indeed.
Sources:
The Key to Unlocking the Potential of Supply Chain Finance – SCF Briefing
Supplier Finance Coming of Age – Treasury Today
Technology is revolutionising supply-chain finance – The Economist
Supply-chain finance: The emergence of a new competitive landscape – McKinsey & Company
