Creative Supplier Financing

In an environment where supplier financing has become increasingly challenging, new models keep springing up to help make sure suppliers have the funds they need.

One model that has now been around for some time is reverse factoring. As Lee Kingshott, general manager, receivables management solution division, Surecomp explained in gtnews in March, reverse factoring means that the factoring company pays for goods when the buyer orders them from a supplier and “in order to take possession of the goods once they arrive, the buyer pays the factoring company the bill plus a finance charge.” In this way, smaller suppliers with less access to finance greatly benefit because they can rely on a larger company’s creditworthiness.

Bankers have also started offering more cross-border financing alternatives that can reduce costs for suppliers, and even for some buyers. Software vendors have helped facilitate creative solutions for supplier financing. Ariba, for example, says that its supply chain finance (SCF) service connects a company and its supplier “in a mutually beneficial transaction with a third-party financial institution”, or even with an alternative third-party funder.

One of the latest developments for supplier financing is when large buyers using their own cash to finance their suppliers. Bank of America Merrill Lynch (BofA Merrill) managing director Bruce Proctor said that companies with large amounts of cash on their balance sheet “set up a framework for a buyer-centric financing”. Corporations that have large amounts of cash “get a better return on financing their own receivables” than they would from keeping the funds in a deposit account or other relatively short-term investments. Suppliers benefit from more easily accessible funding that is at the same rate or lower compared to what they would pay in their own market.

Most of the financing is relatively shorter 90-day loans, Proctor said, and the amounts range from about US$10m to hundreds of millions of dollars. Companies in all industries are involved in these types of arrangements. While a company with cash would provide the funding, they often turn to their bank to set up all the arrangements, such as documentation and disbursement of funds.

It’s easy to see the attractiveness of this new type of arrangement to corporations as well as to banks, particularly banks that are capital-constrained. Earlier this year Bloomberg reported that S&P500 companies held a total of about US$2.4 trillion in cash. As of mid-year, Bloomberg estimated that Toyota, for example, had about US$195bn in cash or cash equivalents and General Electric had about US$154bn. With LIBOR rates well below 1%, companies that can lend out their funds at higher rates to their suppliers would enjoy a significantly higher return. American companies that face up to a 35% tax rate if they repatriate their funds could especially benefit from this type of financing with the cash they hold outside the US.

Earlier this year, Supply Chain Insider said that “the problem with buyers financing their suppliers, which they referred to as ‘dynamic discounting’ is that it does little to reduce cost or risk in the supply chain” because it primarily seeks to maximise returns for the buyer on the short-term cash they use. When companies use banks or other third parties to assess the credit risk as well as to provide logistical support, however, they may be able to enhance supply chain risk management even more.


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