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The win-win-win of supplier financing

The drying up of liquidity and lack of lending – the result of the credit crunch - is continuing to massively impact on corporates that require funding for growth or continue trading where their payment terms with buyers have been delayed.  The move to more open account trading for cross border trade has also required the supplier to fund their receivables for longer periods, sometimes up to six months.  In a recent survey, conducted by Barclays in the UK, 33% of Small Medium Enterprises (SMEs) said that the failure of clients to pay on time actually risked the survival of their business.  

 

The supply chain of an organisation is part of its strategic advantage and any breaks in the chain have the ability to severely impact the end buyer. With the continual push by procurement groups to drive costs down while increasing the quality of the goods and services suppliers can be faced with few options when the cash starts running out.

 

Supplier financing is a win-win-win solution in the current market climate. The supplier wins because they have access to non-recourse financing at a more competitive rate; the buyer wins through off balance sheet financing which can be a key component of working capital optimisation; and the financial institution wins through the new revenue streams generated with the take up of the new product.

 

While there is a risk to the financial institution in providing short term payables funding to the buyer the funding is based on the buyers’ normal activities and new payment terms of the invoice are agreed with the bank. An analysis of the buyer’s liquid assets will provide the bank with a clear view of the liquidity position of the buyer and from there the bank can assess whether sufficient short-term assets are held by the buyer to meet their short-term payables commitments.

 

Multi-currency funding limits, full web visibility and audit control are standard in most solutions with post-trade financing available to the supplier on a non-recourse basis.  The buyer forwards details of the approved invoice through to the service and the supplier can log on and request accelerated payment at any time up to the agreed settlement date.

 

In global trade, supplier financing is an important tool where many supply contracts are now on open account terms and suppliers have to fund their receivables over payment terms typically of 3-6 months.

 

While some would say that supplier financing has been in operation for many years the current model for this service is new.  This is truly an area where corporate procurement and treasury can work together to provide financing to their key suppliers and ensure that in these difficult times short-term liquidity issues will not become terminal. 

2018

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