How innovative financing can mitigate supply chain challenges

Product shortages. Delivery delays. Higher prices.

These are the realities for companies around the world, from manufacturers and distributors to suppliers and retailers, all a byproduct of unprecedented disruptions in the global supply chain. It’s a situation that’s vexing businesses large and small, in industries from apparel and automotive to hardware and technology. 

Amid this environment, supply chain finance represents an opportunity. As order timeframes lengthen and businesses look for solutions to manage cash flow and liquidity, supply chain finance offers an alternative to the traditional B2B procure-to-pay cycle. 

Move your company to the front of the line 

While large multinational companies have trusted supply chain finance for decades, many middle market organizations have not embraced these valuable programs. Many mistakenly believe the benefits won’t offset the costs of launching and maintaining a program, or that their suppliers won’t agree to extended terms and supply chain finance payments. 

In reality, supply chain finance is more efficient and widely accepted than ever before. Technological advances, such as system-to-system API interfaces, can streamline data transmissions, simplify communications and enhance buyer-supplier relationships. 

The rationale behind elevated levels of interest to adopt supply chain finance is simple: It helps give buyers the best possible position when ordering and paying for mission-critical goods. That’s especially important when everything from raw materials to finished products are in short supply. 

Consider this scenario:

  • Supplier ABC has a limited supply of its product, and must choose which buyer orders to fulfill. 
  • Buyer X pays with standard terms, typically a payment arrives at term, ie., day 60. 
  • Buyer Z uses supply chain finance. By working with their bank and supply chain providers, they can offer to pay suppliers electronically in as little as 48 hours, the bank provides terms and this is often accounted for as a trade. 

The value proposition that Buyer Z presents to Supplier ABC is far more attractive. In essence, a buyer may find that the steady and rapid payment suppliers can expect in a supply chain finance program results in a given supplier prioritizing those buyers who make payment easier, faster and cheaper, versus buyers who may not have a sponsored discounting solution. There was evidence of this during the COVID pandemic in 2020- 2021.

Create a potential opportunity for buyers and sellers 

One of the biggest benefits of supply chain finance is that it speaks to the needs of buyers and sellers simultaneously. This can make financing programs a potential opportunity across the supply chain.

The advantages of supply chain finance may include: 

  • Providing much-needed liquidity to buyers and suppliers 
  • Eliminating the need for letters of credit 
  • Reducing factoring or inventory financing 
  • Ensuring a more certain flow of goods 
  • Gaining access to better procure-to-pay and invoice management technology solutions 
  • Strengthening buyer-seller relationships and increasing satisfaction 

Launching a supply chain program at a middle market company requires aligning the organization and demonstrating value. 

For example: 

  • Treasury and executive stakeholders may benefit from extended payment terms, stronger working capital efficiency, and less need to increase leverage to finance operations. 
  • Accounts payable shifts the payment burden of many suppliers to one bank, resulting in lower invoicing costs. 
  • Procurement gains an additional tool to negotiate and recapture savings with suppliers via expedited payments that can help offset the costs of maintaining higher levels of inventory. 

Once each stakeholder understands the value, launching and growing an effective program becomes attainable. 

Middle market manufacturer combats supply chain volatility 

An automotive parts company recently launched a full-featured supply chain financing program to help combat the ongoing effects of their supply chain issues, namely that suppliers were prioritizing orders from their competitors due to the competition offering faster payments via their respective SCF programs.

The manufacturer currently buys its materials (raw and manufactured) from a variety of both large and small suppliers in the U.S. as well as in Asia and the Near East. Prior to initiating a supply chain finance program, the company paid its suppliers with standard cash discount payment terms (i.e. net payments in 30 days, or payment in 10 days if supplier agrees to a 2% reduction in invoice cost). The company, initially skeptical of a program, had divergent internal opinions about the usefulness of a program, but once they realized that they could build commercial discounts largely intact and also receive extended terms, the main obstacle was overcome. The program resulted in a net zero change in the total amount of discounts taken by the buyer, but simultaneously realized several hundred million dollars’ worth of additional cash flow by virtue of adding the program. Those funds were now available to deploy efficiently instead of having them locked up in inventory waiting two, three or even six months before resulting in a sale. Similarly, supplier adoption of the program was nearly instantaneous given the value in having swift, inexpensive, and guaranteed electronic payments made to their bank account.

With a larger program in place, the company now enjoys the same income statement savings of several million dollars’ worth of commercial discounts (i.e. a reduction in costs) but succeeded in extending their Days Payable Outstanding by several months. The suppliers were similarly grateful for the program given that it made both the collection process easier and quicker, and likewise reduced the heavy interest costs incurred via their hitherto standalone financing arrangements. 

With supply chain volatility expected to persist, now is the time for middle market companies to explore the potential of supply chain finance solutions. A knowledgeable and well-connected banking resource can help you get started quickly.