Supply Chain Finance Value

Supply Chain Finance improves working capital for both buyers and suppliers either by leveraging the buyer’s own excess cash, or by introducing a third party funder who leverages the buyer’s credit relationships with banks for the benefit of the supplier- to improve better access to cash throughout the supply chain.

Key facts

  • The estimated global shortfall of working capital in the SME space is $3,900,000,000,000
  • On average 65% of suppliers who are sub-investment grade in a manufacturer’s supply chain
  • Total estimated Buyer liquidity that can be unlocked by SCF – just in the United States – is $500,000,000,000

Stress in the supply chain

  1. The buyer’s objective is to preserve cash and improve working capital through term extension of their payables. Buyers want to pay their suppliers later and increase Days Payable Outstanding (DPO).
  2. The supplier’s objective is to get paid earlier to improve their own working capital and manage Days Sales Outstanding (DSO). This completely contradicts the buyer’s objective.

Solution: Supply Chain Finance

Supply Chain Finance (SCF) programs enable suppliers to be paid earlier at their own discretion. Buyers are rewarded in one of two ways:

  1. Achieving invoice discounts that offer a high implied return – higher APR than they could otherwise achieve on excess cash and liquidity. This is called Dynamic Discounting.
  2. Term extension – suppliers are paid early by a third party who in term offers payables extension (e.g. 15 days) to the buyer. This is called Reverse Factoring.

The value of a Supply Chain Finance solution:

 

Extend Days Payable Outstanding

Facts and Figures Improvement with Reverse Factoring
  • $119M in spending with a single supplier
  • Payment terms are net 45 days
  • Suppliers cost of debt is 6.25%, although WACC closer to 11%
  • Buyer – cash flow gain of $4.9M
  • Supplier – generate $11.4M through early payment on day 10 (instead of day 45)
  • Supplier – saves $270,000 in finance costs through SCF program vs. other financing options

 

Earn Higher Implied Returns on Excess Cash

Facts and Figures Improvement with Reverse Factoring
  • $119M in spending with a single supplier
  • Payment terms are net 45 days
  • Suppliers cost of debt is 6.25%, although WACC closer to 11%
  • Buyer – cash flow gain of $4.9M
  • Supplier – generate $11.4M through early payment on day 10 (instead of day 45)
  • Supplier – saves $270,000 in finance costs through SCF program vs. other financing options

 

Regulatory Involvement

Several regions – including the United States have instituted programs such as SupplierPay (US) that encourages buyers to leverage their balance sheets to support working capital and liquidity objectives of their SME suppliers. The EU has taken further steps establishing the Late Payment Directive so that buyers cannot unilaterally extend payment terms to pay suppliers later than agreed upon terms.

This regulatory involvement increases the value of supply chain financing programs, as buyers may be able to delay payment without negatively impacting the liquidity of suppliers.