The Global Financial Crisis (GFC) was a financial wake-up call for businesses. In countries like Australia, New Zealand, the UK, the USA and the like, where debtors rarely settle their debts within the standard 30 days from invoice terms, cash flow pressures can be especially acute. The GFC saw many business owners left financially exposed as payment terms blew out and reputedly a record number of customers defaulting. As a result private businesses have once again taken the maxim “cash is king” to heart. But instead of looking for ways to increase their cash flow and finding innovative ways to raise cash to keep businesses running, their action has been to pare back their business to meet their current cash flow availability.
So who are the thought leaders in this space? Conglomerates such as Orica, Wal-Mart and Coca-Cola Amatil have all undertaken a review of their cash flow management and employed supply chain financing arrangements to optimise their working capital and cash flow requirements.
Very large multinationals have addressed the liquidity issue by heavily promoting payables financing to both traditional domestic financiers and the suppliers/sellers, particularly the small or medium-sized suppliers. This form of supply chain finance does provide both the buyer and the supplier/seller (particularly the small to medium supplier) a specific cash flow positive solution and at the same time it benefits the traditional financier on margin with a very stable and secure short term risk in the multinational buyer.
The main issues surrounding this form of supply chain financing are the following:
- The buyer has to be a conglomerate (Wal-Mart, Orica, Coca-Cola Amatil, Wesfarmers) for the traditional financier to participate therefore closing the door to SME and larger private business.
- Suppliers/sellers to the conglomerate buyer have to wait until the goods and invoice has been processed, approved by all and sundry including accounts payable and cleared for payment, which generally would be more than 20 days after deliver.
- Even once approved by the buyer, the supplier/seller has to wait 60 days to receive payment unless they are willing to pay an early settlement fee.
- The buyer has to sign an agreement with the traditional financier that once the buyer confirms the invoice no dispute on payment at 60 days can occur.
- The seller has to enter into a factoring agreement with the traditional financier in respect of current and future sales to the conglomerate.
- This financing process is only available for domestic trade and not international.
Another supply chain finance solution is the Octet Trading Card, which is a true B2B Credit Card that specialises in businesses in the $5-150 million transaction range. Their focus is providing a total supply chain finance solution to private businesses and offering innovative unsecured payables financing through an internet based trading portal. The portal creates a global closed community business-to-business process for the exchange of information that enables transaction finance for domestic and international trade.
Buyers and sellers join the Octet closed community, confirm and validate orders online, confirm authorised transactions and offer payments online. Buyers on the one hand enjoy extended credit terms for goods purchased, improved visibility of their cash flow, and an increasingly reliable supply base, while sellers can leverage the buyer’s credit to reduce the cost of capital, obtain lower cost financing and create more predictable cash flow. From the financier’s perspective, they justify the loan/extension of credit, based on the credit worthiness of the business receiving the goods. Under this scenario, the traditional form of Letter of Credit instruments used by sellers to mitigate buyer risk and a means of obtaining pre-shipment financing is no longer required. Letters of Credit are unattractive to Buyers and sellers alike who find them complicated, time consuming and expensive to use.
Traditionally, Cash Flow financing has been directed to the company selling the goods or services and who is providing open account terms. Invariably, facilities such as factoring, invoice discounting or securitisation have been the means of funding those credit sales. The major limitations is that the funding, for obvious reasons, is limited to a percentage of receivables outstanding, and invariably this percentage is correctly reduced due to high concentrations in one or two buyers. Supply Chain Financing overcomes this. Businesses are increasingly looking to supply chain finance to achieve better pricing, improve their cash flows and support their suppliers at home and overseas.
The popularity of supply chain financing is expected to gain momentum as the economy recovers from the impact of the GFC and business looks at means of financing growth.