The buyer-supplier relationship is in constant flux. Both sides are forced to pivot in response to changes in inflation, interest rates and the general economic climate. And the balance of power between the two shifts accordingly.

In recent years, buyers have, for the most part, been dictating terms. In an attempt to hold on to cash for as long as possible, they’ve progressively stretched out payments to suppliers, many of whom have struggled to stay solvent as a result. Now, however, there are signs that the advantage is beginning to swing back to suppliers, although they continue to be challenged by an uncertain economy.

Inflation is a concern for both sides, says Maureen Sullivan, head of supply chain finance with MUFG, the global bank with headquarters in Japan. There are currently two primary challenges that companies are facing as they struggle to achieve supply chain stability, she says: “access to goods and management of cost.” Both are tied directly to inflation, which leads to rising interest rates and, ultimately, higher prices.

As the Federal Reserve continues to notch up interest rates, buyers and suppliers cast about for ways to contain their financing costs. They’re turning to programs that take over the supplier’s receivables for early payment, while allowing the buyer to maintain longer terms.

Such financing programs are of particular value at times when banks are tightening up on lending. “They may make access to traditional types of financing more challenging for suppliers,” Sullivan says. “Financing programs provide an alternative source of liquidity.” At the same time, the supplier can obtain a financing rate based on the buyer’s credit profile, which tends to be more favorable.

While the Fed remains cagey about its plans, the prospect of lower interest rates in the near term seems unlikely. So suppliers will continue to look for ways to mitigate the impact of higher costs and longer payment terms. If they’re unable to do so, “it could impact their ability to produce goods and deliver services, which will be disruptive to a buyer’s supply chain,” Sullivan says. That’s why buyers need to develop lower-cost financing alternatives for critical suppliers.

For their part, suppliers must weigh the advantages of early payment with the reality that such an alternative is often accompanied by a mandated discount off the bill. How much money they have to give up depends on the financing rate and payment terms of the invoice, as well as the credit profile of the buyer. “It’s all predicated on the buyer’s profile, in terms of what discount charges the supplier would potentially be open to,” Sullivan says. The trick lies in determining what’s preferable: getting paid now, or waiting to receive the full value of the invoice?

Sullivan says supply chain financing programs are gaining in popularity as interest rates remain high, especially among middle-market suppliers whose banks tend to impose higher financing costs — if they’re lending at all. In stressful economic times, she notes, “some suppliers may be capped out on their local financing opportunities.” And that creates a market for intermediaries offering to bridge the gap. 

Also weighing heavily on suppliers and buyers these days is the need to maintain higher levels of inventory. The COVID-19 pandemic, and the surge in consumer demand that it brought about, taught everyone a lesson about the risk of a “just-in-time” inventory strategy. Some amount of buffer stock is now the order of the day, even as it threatens to weigh down the balance sheet of the party that gets stuck with it.

The move to “just-in-case” has “turned the whole inventory-management strategy on its head,” Sullivan says. “Lean and mean isn’t necessarily the best approach anymore.” Yet companies carrying higher inventory levels sustain an impact on their cash-conversion cycle, which suppliers attempt to shorten through the sale of receivables, and buyers through extension of their payables.

All of these factors can serve to exacerbate the tension between suppliers and buyers, as they struggle for advantage. But Sullivan believes recent economic trends are forcing the two sides to adopt a more collaborative approach. The emphasis is increasingly on managing supply chain risk, instead of chasing short-term gains. “Buyers now recognize the importance of maintaining relationships with suppliers,” she says.