Creative Payment Terms & Buyer-Supplier Financing

Industry often sees suppliers complaining about cash-flow issues. But the supplier havoc, for the most part, does not need to happen. The solution might be as simple as robust payment terms & creative buyer-supplier financing. Large OEM buying orgs often try to negotiate not paying suppliers for as long 90-180 days after they actually receive material &/or services. As a function of being the customer & often larger, buying orgs often have this kind of leverage. Many large OEMs currently have cash on the sidelines & appear to be very liquid. Sitting on that cash for several months might not be necessary all the while suppliers in their supply chain might be experiencing serious cash flow issues. Why not pay at risk suppliers earlier & perhaps also make cash (in the form of discounts)? Yes, having this kind of visibility will require that you partner with your Tier Is to map & measure your Tier II supply base & beyond.

The key will be determining which suppliers across the entire chain are feeling economic shock. Note, not all buying orgs are in a position to offer early payments terms & alleviate their suppliers’ cash flow issues as they themselves have balance sheet issues. In these situations, the buyers might require their suppliers to take more responsibility for their liquidity & to do so very creatively. Factoring represents a very viable option for suppliers as the CARES Relief package has made available enormous amounts of financing at very low rates. Factoring is a financial transaction that has actually been around a long time & is often used during economic downturns. It is a debtor finance in which a business (supplier) sells its invoices to a third party (called a factor & it is usually a bank) at a discount. A supplier can “factor” its receivable assets to meet its present & fast cash needs. It might also factor their invoices to mitigate credit risk.

Several people also refer to Factoring as accounts receivable factoring or invoice factoring. But what of the buying orgs that are struggling w/ liquidity? Reverse Factoring or Supply Chain Financing is when a bank commits to pay a company’s invoices to the suppliers at an accelerated rate in exchange for a discount. It is unlike traditional invoice factoring, where a supplier wants to finance their receivables. Reverse factoring is a funding solution started by the ordering party (buyer) to help their suppliers finance their receivables more easily. Typically at a lower interest cost than what factors normally offer, which would be the case in today. Using this financing, buying orgs basically borrow money to pay their bills, extending traditional 60-day payment terms to 6 months or more. It would be like taking a loan to pay a credit-card bill. The arrangement gives companies flexibility w/ their cash for a low cost, & it even boosts working capital because it does not count as borrowing. Instead the loans are treated as trade debt or accounts payable, & it does not need to be disclosed. Supply-chain financing is the mirror image of factoring of receivables discussed earlier.

Buyers benefit from extended payment terms & no additional bank debt. These financing arrangements are viable & plentiful during the current cash crunch. The risk is that if banks stop providing the cash to companies, it would force them to pay their bills much more quickly at the worst possible time. This is very unlikely with the multi trillion dollar stimulus packages. While the money keeps flowing, companies can get cash to their suppliers quickly while waiting for their own cash flow to improve. In the next few months, firms need to start looking at supply chain financing to see how to help their cash strapped suppliers as this can be a tool to inject some liquidity. Yes, the lack of transparency is a risk if this economic recovery contracts. But these stimulus packages have made hundreds of billions available for OEM types & their suppliers. Buying organizations might need to give suppliers the option of using its supply-chain financing arrangements to manage their operating cash flow. These arrangements might make a lot of sense to use if indeed this V shaped recovery continues.


The Monthly Metric: Cash Flow From Operations

Long term in your careers, understanding SCM Finance will be critical.

Do you know what this means? 2/10 net 30 (now employers want Supply Chain Managers to be Financiers!!??)
The worlds of Finance and SCM have collided. Your opportunities are endless if you learn how to talk to the CFO…

My discussion on why I maybe recommend a Finance graduate degree for SCM students: and

The good news is that industry will pay more for more strategic skills (i.e., Finance)…

Long term in your careers, understanding SCM Finance will be critical. At the end of the day, SCM executives are evaluated on generating shareholder value (bottom line financial kind of stuff, of which has gotten very creative and complicated). Also, more and more SCM VP’s (C-suite types) are reporting directly to the CFO of the company (because SCM is that important to the bottom line). Students often ask me, if they go on to get a graduate degree, what should they get it in. I say get a graduate degree in something you are weak in but will matter in your career (especially long term). You will hit a ceiling professionally if you do not understand SCM Finance. So, I would give that serious consideration in your graduate education.  
The Monthly Metric: Cash Flow From Operations
A great read:

Here it comes:

Supplier financing disclosure would be required under proposed accounting rule.
The trade payable arrangements, which help companies manage cash, typically aren’t publicly reported even though they pose a liquidity risk.

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