There is a financing tool that helps power Boeing, Keurig Dr Pepper and the companies behind brands like Supreme and Svedka. This tool keeps cash flow humming and suppliers satisfied. There was some $1.8 trillion wrapped up in it as of 2021, according to The Wall Street Journal.
But unless you specialize in financial arrangements, you likely know nothing about it! (Even though it’s used by a majority of Fortune 500 firms, according to Bob Glotfelty, chief growth officer at fintech company Taulia.)
It’s called supply chain financing. The uninitiated and accounting geeks alike are about to be seeing the term a lot more. The Financial Accounting Standards Board, which sets financial and accounting standards in the U.S., requires companies to disclose if and how they use supply chain financing in financial quarters starting Dec. 15, 2022.
Just to get started …
What the heck is supply chain financing, and why are you expecting me to learn about it?
Yes, I know it sounds boring. But it’s interesting, I swear.
Let’s think of a Fortune 500 company, like Premack Mart. This retail behemoth needs $100,000 of disposable razors from Rachel’s Quality Blades. Premack Mart sets a 60-day payment plan, but Rachel’s Quality Blades want to be paid earlier.
This is where supply chain finance comes in. A bank or another financial institution that works with Premack Mart could pay the retailer’s suppliers on any day of the payment term. That third party takes on the risk of waiting between paying Premack Mart’s suppliers and receiving that payment from Premack Mart.
Of course, there’s a premium for how early suppliers get paid. If those suppliers decide to get paid out on day five of their 60-day term, maybe they only receive, say, $99,500. The financial institution keeps that extra $500.
“It’s a way to get cheap, streamlined, easy access to cash for a supplier when they need it,” said Glotfelty of Taulia.
The key to qualify for supply chain financing is having top-tier credit worthiness. So, the multinational Premack Mart might be able to offer the option to Rachel’s Quality Blades. But Rachel’s Quality Blades, a mom-and-pop, is less likely to be able to offer the program to its own supplier of plastic handles, Smith’s Stuff.
The assumption for a bank is that it’s really not a risk to offer to cover the bills for a company like Walmart or Amazon or Ford. And, for those companies’ suppliers, the terms of a supply chain financing program are more favorable than taking out a loan from a bank to cover cash flow while waiting for payment.
More transparency is a good thing
Supply chain financing has been around for at least three decades, said U.S. Bank SVP Dan Son, who leads the company’s global banking division. Its disclosure is a long time coming.
You might expect the wizards behind supply chain financing to be unhappy that disclosure is now required, but it seems to be the opposite. According to Taulia’s Ali Ansari, who oversees supply chain financing at the firm, the tool may become even more popular now that there’s more clarity.
In other words, supply chain financing isn’t something to hide on your balance sheet anymore. There have been cases of supply chain financing gone awry. Previously, companies that use this tool could classify this cash as “accounts payable” rather than as debt. Some companies have used supply chain finance to cover up financial insolvency, as the Financial Times reported in 2021. Ansari said such cases are rare.
It’s not expected that investors will interpret any usage of this instrument as suspicious, experts said.
“The reliance on supply chain finance by itself is not necessarily a red flag, as long as it’s properly disclosed and understood,” said Olga Usvyatsky, the former vice president of an accounting data provider and current Ph.D. student at Boston College.
The people demand more supply chain financing
The past few years have been good for the supply chain finance world. There are a few reasons for this.
One reason is that early in the pandemic, companies delayed or missed payments to their vendors, as The Wall Street Journal reported in 2022. This led to concerns about their suppliers’ cash flow. Another reason is that consumers began buying more, which led companies to stock up on inventory, putting pressure on their cash flow.
The supply chain finance market increased 38% in 2021 compared with the previous year, according to data from BCR Publishing reported in the Journal.
But the growth hasn’t stopped. As my colleague Todd Maiden wrote in September, supply chain finance programs attracted still more interest in 2022. Rising interest rates mean that other ways to access cash have gotten more expensive.
Under the specter of the payment term
U.S. Bank’s Son said this tool is a “win, win, win”; it strengthens the entire supply chain by ensuring vendors large and small can access cash when they need to, while large companies can pay when it works best for them.
I could see supply chain financing justifying ultralong payment terms, however. If you’re a wee company and a multinational is demanding a payment term stretching to 180 days, there’s not much you can do to fight that. You can of course get paid in a shorter time frame than 180 with supply chain financing, but there’s a penalty as a vendor.
Sometimes suppliers do push back. We’re seeing right now that vendors of Bed, Bath & Beyond are demanding the troubled retailer pay upon delivery or in a shorter period of time. It’s a good way to make sure one still gets paid should Bed, Bath & Beyond go bankrupt.
What do you think of supply chain finance? Will you look out for it during the next earning season? Will you buy from Rachel’s Quality Blades? Do you have something completely unrelated to share?
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