More companies are offering their vendors supply-chain financing, a tool that allows them to pay their bills later while giving suppliers faster access to cash.
supply chain financing Can boost the cash position of both buyers and sellers. A third party, often a bank, pays the seller’s invoice but takes a deduction. The company pays the bank the amount that was payable under the invoice, although at a later date than originally required. The deduction of the bank is determined by the credit rating of the company.
Supply-chain shocks over the past two years have prompted businesses to stay home on whether major vendors have enough cash flow to stay after many companies. delayed supplier payment in the early stages of the pandemic. As a result, sellers were paid late or not at all.
In recent quarters, companies have focused on inventory, putting pressure on their own working capital. This is prompting some businesses to extend payment terms even further and launch supply-chain financing programs to bridge the gap. Rising interest rates also drive demand for supply-chain financing programs, as the programs provide suppliers with relatively cheap sources of cash.
According to estimates by data provider, BCR Publishing Ltd, the size of the corporate supply-chain finance market grew globally to $1.8 trillion last year, up 38% compared to 2020.
Meanwhile, the inventory levels of companies in the S&P 500 index rose 15% to $1.13 trillion during the first quarter from a year earlier, according to data provider S&P Global Market Intelligence.
Large retailers and e-commerce companies often try to push payment terms on their suppliers if they have too many items on the shelf, said Jake Jacobson, partner at professional services firm Ernst & Young. “Often suppliers are not paid until the product is sold,” said Mr. Jacobson.
According to a survey of the largest 1,000 US companies by revenue from a business advisory firm, companies increased their outstanding payment days to 62.2 days in 2021 from 61.9 days a year earlier.
hackett group Inc.
This figure has increased in the last decade.
constellation brand Inc.,
The maker of beer, wine and spirits, including Corona Beer and Svedka Vodka, plans to launch a supply-chain financing program during its fiscal year ending February 2023, it said in a June securities filing. The program, offered through a financial institution, will be available to certain suppliers and help them manage their cash flow, the Victor, NY-based company said.
“We are still evaluating the impact of this program on future liquidity,” Constellation said in its filing. The company’s inventory grew 20% to $1.66 billion during the quarter ended May 31, compared to the prior-year period. Its outstanding days arrears rose to 67 from 58 a year ago and to 52.9 during the period ended May 2020.
a data provider. A year ago, before the pandemic, the company’s outstanding days stood at 66.2, FactSet said. Nakshatra did not respond to requests for additional comment.
VF Corporation
, which owns shoe and clothing brands including Vans, The North Face and Supreme, began offering its program during the quarter ended December 31, according to its annual report filed in May. The company temporarily suspended the program earlier this year and reinstated it in May. VF declined to comment, citing the quiet period before its earnings release on July 28.
Inventory rose 34% to $1.42 billion during the quarter ended March 31. According to FactSet, the company’s days due dues declined from 38.6 to 32.8 in the same period.
Paul Schuldiner, chief loan officer at Rosenthal & Rosenthal Inc., a non-bank lender, said companies look to supply-chain financing as a way to ensure sellers have cash so that goods and services are delivered on time. “It is a way to get liquidity across the channels,” Schuldiner said.
When interest rates rise, the demand for supply-chain financing often increases, said Josh Nelson, principal at Hackett Group Inc. For example, if a buyer’s credit rating is higher than that of a supplier, this type of financing reduces the seller’s need for higher access-cost financing elsewhere. “With interest rates rising, it becomes a more attractive option,” he said.
A Minneapolis-based bank has more than doubled the size of its supply-chain financing business in the past year, said Dan Son, head of global banking. He declined to specify the size of the total portfolio.
Companies are interested in ensuring that their key suppliers remain in business, Mr. Son said. “Supplies are a fundamental source of your day-to-day operations,” he said.
John McQuiston, head of structure and program management at the financial-services company, said supply-chain financing can help companies that are affected by inflation but are unable to reverse the impact quickly.
& Co. “This additional cash flow provides flexibility,” McQuiston said. Wells Fargo’s supply-chain financing program has increased in size, he said, but declined to share details.
Millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers move mountains of goods to stores and homes every day to meet the ever-increasing expectations of consumer convenience. But this complex movement of goods that supports the global economy is far more vulnerable than many imagine. Photo Illustration: Adele Morgan
Companies typically record outstanding amounts under their supply-chain finance programs as accounts payable, meaning the amount is not treated as a loan like a traditional loan. accounting treatment can Strengthen the company’s liquidity position Because it increases working capital but not total borrowing.
Companies are not required to disclose whether they provide supply-chain financing, but The US Securities and Exchange Commission asked select companies to share more details, Because this type of financing can hide the inherent risks from investors.
Greensil Capital, a UK-based provider of such funding, filed for bankruptcy Last year.
The Financial Accounting Standards Board, which sets US accounting rules, proposed requiring companies to disclose key terms and the size of their supply-chain financing in 2021. The board is set to consider taking the proposal forward at its meeting on Wednesday.
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