While it's known that supply chain finance (SCF) provides cash flow predictability and control to buyers, it is less known that suppliers benefit from early payment of receivables with cash flow improvement and economic security. From investment grade suppliers to those on the tail end, suppliers of all sizes have seen the benefit of SCF realized through visibility via technology, payment flexibility and growing their own working capital to invest in growing their business. -Nathan Feather, CFO, PrimeRevenue
Many businesses rely on freeing working capital to achieve liquidity goals to pay for strategic initiatives or to provide a cushion during unpredictable economic times. When it comes to SCF, there are several options available to investment grade buyers and very few for those with lesser credit ratings. Many of the options available, notably those offered by big banks or broadly-focused fintechs, do not consider the buyer's key supplier relationships nor do they do much to assist the suppliers once a buyer decides to extend payment terms.
With some banks being notorious for choosing their own bottom line over what’s best for the customer, the future of SCF will see a continued shift from a bank-led to a multi-funder, supplier-considered solution as buyers learn to mitigate unnecessary risk. Furthermore, with a growing demand for machine learning and artificial intelligence, the most successful businesses will require a human-led approach whereby a strategic planning process takes place, considering and valuing a buyer’s relationship with all of its suppliers – no matter how small or large.
Times are uncertain, but businesses continue to thrive and take steps to mitigate risk when increasing working capital through SCF solutions. This being the case, suppliers can consider three ways a SCF program can prepare them for a more secure future.
1) Funding 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.
2) Easier to weather economic turbulence. Rather than waiting on large customers to pay invoices (often overdue in these circumstances), suppliers 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.
3) 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 SCF 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, SCF is a true sale of receivables and has no effect on the supplier’s balance sheet.
The future is uncertain, but supplier relationships are necessary to a business, just ask any procurement professional. Buyers should consider options that benefit both themselves and their suppliers. Suppliers should consider how their customers’ working capital strategies may end up benefiting them in the long run and what that could mean for the security or scale of the business.
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