Leveraging Supply Chain Finance

This is an excerpt of the original article. It was written for the March-April 2018 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2018

"Inflation creeps into U.S. Supply Chain.” So said the headline on a Wall Street Journal article I read this morning before writing this column. The Journal went on to write that U.S. companies are grappling with rising material and ingredient costs on top of pressure from higher wages—a potential double whammy— and noted that companies like Whirlpool and Ford have already issued warnings to the market.

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In a business climate where optimizing cash flow, lengthening payment terms and preserving financial assets have become strategic imperatives for most companies, supply chain, or supplier, finance is gaining in popularity across the global supply chain. Through a “reverse factoring” process, this financing option finds suppliers “selling” their invoices to a bank or other entity at a discount, and then paying those invoices later while suppliers get paid earlier.

Rather than relying on the individual supplier’s credit, the middleman (usually a bank) deals directly with the buyer. A large, global manufacturer, for example, can use supply chain finance to pay its suppliers later, thus boosting its own working capital while holding onto its cash for a longer period of time.

In a best-case scenario, both supplier and buyer improve their own working capital while the middleman receives a fee for its services. And because the risk is transferred to one buyer (versus a group of buyers, as in the case of factoring), it tends to be a less expensive and less risky proposition. Through it all, the end game is to give suppliers access to beneficial financing options as a result of the buyer’s good credit rating.

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