T he adage “cash is king” remains as true as ever. Profitable companies can still run into trouble if they lack cash to pay their bills. This fact can give rise to tension with suppliers, who often need to receive payments more quickly than their customers—most of whom are trying to hold on to cash—prefer to pay.
and regional banks, as well as non- bank funders. While the term “supply chain finance” sometimes is used as a catch- all to describe different working capital solutions, it’s increasingly used when referring to a defined task, says Thomas Dunn, chair of Orbian, which provides working capital management solutions. That task is the financing of receivables that the buyer has approved and confirmed. SCF starts with the buyer in a business-to-business transaction. The buyer lets the financial organization know it’s committed to paying a specific amount on a set date, to a specific supplier. The buyer within an SCF program
financial officer with PrimeRevenue, a provider of working capital solutions. Now, some companies with several hundred million in revenue are using it. Similarly, SCF funders previously tended to be large global banks. Over the past five years or so, the universe of funders has expanded to include local
Supply chain finance (SCF), sometimes referred to as “reverse factoring,” is a working capital tool that can help both parties. “SCF enables a buyer to optimize working capital by extending payment terms to its suppliers, who in turn gain access to efficient financing via a bank or other third party,” says Maureen Sullivan, head of supply chain at Mitsubishi UFJ Financial Group (MUFG). Using SCF to successfully manage cash flow enables companies to cut debt and boost profitability, says Joerg Obermueller, senior vice president for supply chain finance with CIT. Conversely, failing to manage cash flow can lead to breached loan covenants, delayed shipments, and unnecessary debt. SCF MARKET GROWTH SCF offers several benefits over other working capital tools. It’s often less expensive and more efficient. It also provides suppliers visibility to upcoming payments. These qualities have helped drive growth in the SCF market. Global volume jumped by 35% between 2019 and 2020, to top $1.3 billion, according to the World Supply Chain Finance Report 2021. Growing awareness of SCF among leaders at mid-market companies has also contributed to its growth. Initially, SCF was deployed primarily by corporations with at least several billion dollars in revenue, says Nathan Feather, chief
often is a large investment grade corporate, says John Monaghan,
managing director with Citigroup. This is key, as the discount rate applied to the early payments is predicated on the
In addition to supply chain finance and traditional bank financing, several other tools can help companies boost working capital. They include: Dynamic Discounting: With a dynamic discounting program, vendors decide when they’d like to get paid in exchange for a reduction in the price of the goods or services their customers purchased. Typically, the earlier the payment, the greater the discount. Dynamic discounting tends to be done on an invoice- by-invoice basis. Buyers use their own cash to make the payment. Factoring or Receivables Financing: In factoring, a firm sells its accounts receivables at a discount to a third party—the factor—which assumes the credit risk of the buyers. The factor generally pays between about 75 to 80% of the receivables value upfront, and then the remainder, less a discount, when the customer submits payment. Factoring can make sense when companies are growing quickly. Purchasing Cards: A purchasing card or P-card is a commercial card that allows organizations to use the existing credit card infrastructure to make business-to-business (B2B) electronic payments. For buyers, P-cards can streamline the procure-to- pay process, particularly for purchases of inexpensive items. Many also offer flexibility in billing cycles, allowing payment days or even weeks after a transaction, so buyers can hold on to their cash, even as their suppliers are paid more quickly. TOOLSTOBOOSTWORKINGCAPITAL
February 2022 • Inbound Logistics 43
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