There are some retailers who prefer to keep their suppliers alive – but barely alive. Unlocking trapped value in the supply chain has become a key survival tactic over the past 18 months. Cash flow has been the toughest nut to crack, and has forced business focus onto slashing inventory and making supply chains as lean as possible. But the recession has also put strain on buyer-supplier relationships; with invoices tossed back and forth like hot potatoes.
Invoice ownership has always been a thorny subject, with suppliers often looking to optimise their balance sheet and needing access to funds earlier in the supply chain at good rates, as a result of buyers’ desire to delay ownership. But it was only after the recession struck that it hit home just how vulnerable this traditional relationship had left both parties, particularly the supplier.
Late or continual deferment of payment has been one of the nastiest side effects to the lack of cash flow, and has, in some cases, ended in bankruptcy. Last year £30.4 billion’s worth of invoices were owed to British SMEs, according to research conducted by Bacs Payment Schemes, and with any late payment, often the buck doesn’t stop with the one supplier, but spreads across the supply chain.
It is trends like these that have pushed alternative payment structures, such as supply chain financing, into the spotlight. This concept has shot up the ranks as an effective way to stabilise the supply chain by providing financial support for suppliers, in turn reducing the risk of them folding as a result of too many late payments and not enough cash to tide them over.
The principles of supply chain financing have been around for nearly a decade, but it is only really in the past 18 months that the concept has started to take off in a big way. Tom Dunn, chairman of supply chain finance specialist Orbian, says: “The credit crisis brought it to the forefront, as treasurers and CFOs began to realise they had to act fast to protect their strategic financial supply chains.”
When customer demand falls, large companies at the end of the supply chain tend to look to their suppliers to share the burden of that downturn. This almost always gives the buyer the upper hand. However, Avarina Miller, senior vice president of London-based working capital solutions provider, Demica, thinks supply chain financing will change this. “The days when buyers were in a position to push suppliers and optimise payment terms are over. This [supply chain financing] is another tool that supports the supply chain, without pushing suppliers to the brink,” she says.
The traditional way for businesses to get funding has been via factoring houses – a business sells its accounts receivable (ie invoices) to a third party (the factor) at a discount, in exchange for immediate money with which to finance continued business.
However, supply chain financing is a lot more than just factoring, early payment discounting, or inventory shifting. It’s about balancing credit, financing options, inventory management, and other supply chain variables to optimise working capital, and much more.
Orbian, a pioneer of the concept, runs its process as such: suppliers submit invoices as usual, which the buyer then approves. That approved invoice information is then sent automatically to Orbian, and the suppliers view the approved invoices via a secure web site, and elect to sell the receivables. Orbian then delivers non-recourse cash to the suppliers. The buyer will then settle with Orbian on the payment-due date, and Orbian settles payment with the owner of the receivable.
Discounting
This, unlike traditional factoring methods, reduces risk for the supplier. Dunn says that one of the advantages of exchanging non-recourse cash is that “if the buyer doesn’t pay, the lender can’t then go after the supplier to get the money back.”
Another advantage over factoring, is that the latter involves the receivables being sold at a cut-down rate – typically knocking some ten to 15 per cent off the total value, whereas, in a supply chain finance set up, suppliers can discount 100 per cent of the value of the receivables to cash at a good discount rate that is based on the buyer’s credit worthiness; allowing the supplier to piggyback on the back of the buyer’s credit strength.
