A Cure For The Financial Supply Chain Sickness

Between stretched-out payment terms, the threat of late payments and the everyday challenges of operating as a smaller enterprise on a global scale, the world’s suppliers have a tough time managing cash flow.

Suppliers look to various financing solutions to fill in their cash flow gaps, but a lack of credit history often means expensive loans. It’s a vicious cycle and one that makes today’s global supply chain plagued, argue SAP Ariba and PrimeRevenue.

The procure-to-pay platform of the Ariba Network revealed last week a new joint venture with the supply chain financing solution offered from PrimeRevenue. In an interview with PYMNTS, PrimeRevenue SVP of Marketing Tom Roberts and SVP of Business Development Dan Juliano, along with SAP Ariba Senior Director of Marketing Drew Hofler, discuss the symptoms of a sick global supply chain and why the burden of finding a remedy doesn’t always have to fall on the supply side’s shoulders.

The Root Cause

According to Hofler, the root cause of much of the global supply chain’s struggles today stem back to the financial crisis of 2008–09, a period that saw corporate buyers stretching out payment terms. It’s a trend that still echoes into today.

“If you look at pre-2008–09, the credit availability is still less today than it was,” he said. “You have a lot of suppliers in a situation with longer payment terms.”

This practice has reverberated throughout the entire financial supply chain, he explained, and can be lethal for a company. “More companies have failed as a result of a lack of cash flow than as a result of being a bad business,” Hofler added. “So, when we say that supply chains are sick, what we’re talking about, in a lot of ways, is the imbalance produced by terms being pushed out and a lack of accessible cash flow for suppliers.”

Finding The Right Cure

With more suppliers in need of cash flow than before the financial crisis, the market has swung its spotlight on small business lending. From traditional bank financing to alternative loans, invoice financing and factoring to revolving lines of credit and even tools like p-cards, there are dozens of options for suppliers — often SMEs — when seeking cash.

The problem, the SAP Ariba and PrimeRevenue executives argued, is that many of these solutions are expensive because suppliers are so high-risk.

“We all know that bank’s aren’t providing a lot of financing for small and medium-sized enterprises,” stated Juliano, adding that solutions like p-cards and dynamic discounting are expensive for a company that’s already struggling on the books.

Enter: supply chain financing.

The biggest benefit of supply chain financing, the executives said, is that it removes the burden of debt financing from the supplier. The joint venture between the firms will see PrimeRevenue connect suppliers to faster payments by offering corporate buyers on the Ariba Network a chance to sell outstanding bills. An investor finances that invoice for the buyer, cash lands in the bank account of the supplier and the buyer is tasked with repaying the loan.

Placing that burden on the buy side, said Hofler, is a more strategic way to ease cash flow burdens in B2B transactions.

“The cost of financing is based on the credit rating of the buying organization,” he explained, noting that these firms are often major, multinational, investment-grade organizations, “while the supplier may not be investment-grade at all.” Financing based on the risk of the buy-side organization makes for cheaper financing overall, the executives said, and allows suppliers to access funds without acquiring more debt.

Why Buyers Will Go Along

Buy-side organizations are wont to take on the burden of supply chain financing to improve their supplier relationships, said Hofler.

For suppliers, this means avoiding extended — or worse, late — payments. “What [supply chain financing] does is remove the opportunity to be paid late, or even later, because the supplier can now get paid as early as they want.”

While Hofler added that, overall, suppliers are burdened with facing later payments and tasked with sorting out the matter themselves, supply chain finance is a way for a buy-side organization to help improve the overall health of supply chains by aiding their business partners.

Don’t be misled; that doesn’t mean corporate buyers are using supply chain financing tools out of the goodness of their hearts.

Rather, explained Juliano, buy-side firms will see an improved bottom line through improving the health of their suppliers and supply chains.

In the physical supply chain, if a tsunami hits Japan and a Japan-based supplier can no longer supply the needed parts for, say, a car manufacturer, clearly, that will hurt the bottom line. The same goes for the financial supply chain, Juliano said.

“If your supplier cannot access the cash flows they need, then worst-case scenario, they can’t exist,” he noted. “They cease to be able to provide the physical goods and services that you need.”

Even if circumstances aren’t that dire, corporate buyers will see a negative effect of a supplier struggling to access cash.

“The more your suppliers have to depend on credit and high-cost options they have, the more that’s going to find its way into your bottom line as well,” Juliano added.

According to Roberts, PrimeRevenue has seen the knock-on impact of corporate buyers improving the cash positions of their suppliers through supply chain financing. One of the most prominent, he said, is that corporate buyers that access financing to cover their outstanding bills re-invest that cash back into their operations.

The benefits trickle back down to the supplier, too.

“It also helps the supplier react, and a healthy buyer overall will help suppliers as well,” Roberts stated.

With the Ariba Network now offering supply chain financing to corporate buyers on its platform, the companies said they hope to ease the strain of cash flow for smaller suppliers, even when their corporate customers have to extend payment terms.

The move relieves at least some of the weight of cash flow issues off of the supplier, and with a strengthened business relationship, corporate buyers can see their own benefits. According to the executives, businesses today are increasingly aware of the importance of strategic supplier relationships.

“Buyers can look at supply chain financing, and they weigh that benefit by ensuring suppliers are healthy, getting the lowest pricing on credit and cash flows so, ultimately, their costs are less,” explained Juliano. “But it also increases that relationship between buyer and supplier, where the buyer is providing the supplier a benefit. It increases the collaboration between the two. It really does remove cost and risk, and that’s the bottom line. That means a lot to a buyer.”