This article is posted at the WSJ by one of their reporters and the contents will not come as a great surprise to many of the readers of these pages, since it’s about the heavy uptake of supply chain financing (SCF) during the past couple of years, which continues into these current disruptive times. We have been covering the topic for quite some time in various forms. As many will know, SCF comes in various forms and definitions depending upon your information sources. The author indicates that companies are paying lots of attention to inventory, which is part of the cash conversion cycle and therefore impacts working capital management. As a result buyers will revert to extended DPD, which in turn puts pressure on supplier DSO. That is where SCF comes into play.
Supply-chain snarls over the past two years have prompted businesses to home in on whether key vendors have sufficient cash flow to stay afloat after many companies delayed supplier payments during the early stages of the pandemic. As a result, vendors were paid late or not at all…..Companies in recent quarters have bulked up on inventory, putting pressure on their own working capital. That is leading some businesses to push out payment terms even further and launch supply-chain financing programs to bridge the gap. Rising interest rates also drive demand for supply-chain financing programs, as the programs provide suppliers with a relatively cheap source of cash.
As stated earlier there are many forms of SCF and the one that the author describes appears to be reverse factoring, whereby the buyer will utilize their own credit status to get supplier invoices paid earlier by a funding entity (typically a bank but can be any form of financier within the network) and the buyer will pay back that entity (less a fee) at the negotiated due date. This type of SCF removes the potential difficulties that certain suppliers may have with obtaining credit, especially in the long tail of the supply chain. Other types of SCF include receivables financing and factoring. The options around SCF have become more visible given the rising interest rates, inflation and physical supply chain disruptions, all which can contribute towards cash flow issues and potential business failure. The author cites some statistics and gets a bit into the accounting treatment of this form of SCF, so worth a quick read for those interested in the topic.
U.S. Bancorp, a Minneapolis-based bank, has doubled the size of its supply-chain financing business over the past year, said Dan Son, head of global banking. He declined to specify the size of the total portfolio….Companies have an interest in making sure their key suppliers stay in business, Mr. Son said. “Suppliers are a fundamental source of your day-to-day operations,” he said….Supply-chain financing can help companies that are squeezed by inflation but unable to quickly offset the impact, said John McQuiston, head of structuring and program management at financial-services company Wells Fargo & Co. “It provides that additional cash flow flexibility,” Mr. McQuiston said. Wells Fargo’s supply-chain financing program has increased in size, he said, but declined to share details.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group