In June, the SEC sent letters to those blue-chip companies asking about the popular financing agreement, in which a form of short-term borrowing is used that frees up cash but could hide risks from investors, according to WSJ.
The funding is often provided by banks and pays a company's funding earlier than usual with a slight discount. Then the balance is collected later on, a bit later than it would normally be collected.
The issue, according to WSJ, is that supply chain financing isn't always clearly identified on a company's financial statements, and many companies just record it as accounts payable (AP). That leads some to claim it paints an overly rosy pictures of a company's fiscal health, particularly if banks pulled the financing suddenly.
The SEC provided general guidelines on how to go about supply chain financing and other modes of short-term financing with the pandemic's fiscal disruptions, saying that companies should provide "robust and transparent disclosures." Ben Lourie, an assistant professor at University of California, Irvine’s Paul Merage School of Business, said there's "almost no information" about supply chain finance, and that people might not have the best information when building valuations and risk models for companies.
To Coca-Cola, for example, the SEC sent a letter asking the company to clarify a $1.1 billion AP increase from 2019, which the agency learned was from a supply chain finance program.
Meanwhile, the Global Supply Chain Finance Forum also took a stand this week about what it said were misuses of this type of financing. The group said companies should watch out for overt coercion to join such financing programs, and that they shouldn't feel obliged to participate if there's no explicit need to do so.