Supply-chain financing is a trend that seems to be growing in various industries lately. A typical supply-chain finance agreement works when banks provide funding to pay a company’s supplier of goods and services. The supplier is then paid earlier—but less—than it would be paid without the agreement.
For small suppliers, the financing can provide money for their operations without having big companies extend their payment terms, potentially by months.
The company pays the money it owes the supplier to the bank, often later than it would have paid its supplier. The bank keeps the amount it doesn’t pay to the supplier in exchange for its services.
Supply-chain finance has been around for several decades. Companies started using it more frequently after the 2008 financial crisis, when many businesses wanted to preserve cash on-hand by extending payment terms with vendors.
Since then, the market for this short-term borrowing tool has expanded, with banks and other providers offering digital tools to help companies manage related processes, such as procurement.
Large global manufacturers are also regular users of supply-chain financing to extend payment terms.
But there tends to be a barrier to entry for some businesses, especially those with weaker credit ratings. These ratings help determine the discount rate applied to the payment the supplier receives. The better the credit rating of a company, the cheaper it is for the supplier to participate in the program.
“Smaller companies have to just deal with the fact that their discount rates are fairly high,” said Rudi Leuschner, associate professor of supply chain management at Rutgers University.
Large financial institutions, including JPMorgan Chase & Co. and Citigroup Inc. are the most frequent providers of supply-chain financing. Banks provide capital and run the programs for companies. Financial technology and logistics firms in recent years also have started to provide such funding.
Why Do Chief Financial Officers Rely on Supply-Chain Finance?
Supply-chain financing frees up cash without a great deal of cost and effort, which is an advantage for chief financial officers (CFOs) looking to hold money for longer. They record the owed amount as accounts payable on their balance sheet, unlike a traditional loan. Doing so makes their companies’ liquidity position appear stronger.
Coca-Cola Company, for example, has been working to better manage its payables through supply-chain financing, CFO John Murphy said in November. The company launched its program in 2014, but didn’t disclose it until last year because it didn’t have a material impact on its liquidity.
The COVID-19 pandemic has accelerated the use of the tool, corporate advisers and accountants said. Supply-chain finance provided companies with a key source of cash as they were battling the fallout from the pandemic, while enabling them to continue to pay important suppliers.
“Supply-chain finance fundamentally is about managing cash. And cash is king, especially now in light of the strains we’re seeing on supply chains,” said Mark Hermans, a Managing Director for operations consulting at PricewaterhouseCoopers who focuses on supply-chain finance.
U.S. companies aren’t required to disclose supply-chain financing arrangements in their filings, but the SEC in recent months has been asking some of them to provide more information to help investors assess potential risks. The regulator last June issued guidance urging companies to provide robust, transparent disclosures on supply chain and other short-term financing during the pandemic.
The lack of information about companies’ supply-chain programs affect key financial metrics used to assess the health of a business and can cause issues for shareholders and other users of financial statements.
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