From WSJ: Companies are setting up programs to improve working capital and cut costs while disclosing few details.
The struggles of Greensill Capital have shone a light on the increasing use of supply-chain financing, a tool that gives companies the ability to extend their payment terms to vendors.
Regulators and standard-setters are closely watching if and how companies disclose their use of the financing tool, which has come into focus amid the recent problems seen at Greensill, a major provider of supply-chain finance, which plans to file for insolvency in the U.K. this week and is facing regulatory scrutiny.
How Does Supply-Chain Finance Work?
As part of a supply-chain finance agreement, banks provide funding to pay a company’s supplier of goods and services. The supplier is then paid earlier—but less—than it would be paid without the agreement.
For small suppliers, the financing can provide money for their operations without having big companies extend their payment terms, potentially by months.
The company pays the money it owes the supplier to the bank, often later than it would have paid its supplier. The bank keeps the amount it doesn’t pay to the supplier in exchange for its services.
Supply-chain finance has been around for decades. Companies started using it more frequently after the 2008 financial crisis, when many businesses wanted to preserve cash on-hand by extending payment terms with vendors.
Since then, the market for this short-term borrowing tool has expanded, with banks and other providers offering digital tools to help companies manage related processes, such as procurement, according to professional services firms KPMG LLP, PricewaterhouseCoopers LLP and the Hackett Group Inc.
Which Companies Can Use Supply-Chain Finance?
Large manufacturers, such as airplane manufacturer Boeing Co., and other global companies, including soft drinks producer Keurig Dr Pepper Inc., are avid users of supply-chain financing to extend payment terms.
But there tends to be a barrier to entry for some businesses, especially those with weaker credit ratings. These ratings help determine the discount rate applied to the payment the supplier receives. The better the credit rating of a company, the cheaper it is for the supplier to participate in the program.
“Smaller companies have to just deal with the fact that their discount rates are fairly high,” said Rudi Leuschner, associate professor of supply chain management at Rutgers University.
It is unclear how many companies have supply-chain finance programs. Twenty-seven companies in the S&P 500 disclosed in their 2020 annual reports they are using the tool, up from 13 the previous year, according to data provider MyLogIQ. Between 2015 and 2019, an average of about eight companies in the S&P 500 said they used supply-chain finance.
Who Are the Providers?
Large financial institutions, including JPMorgan Chase & Co. and Citigroup Inc., are the most frequent providers of supply-chain financing. Banks provide capital and run the programs for companies.
Financial technology and logistics firms in recent years also have started to provide such funding, sometimes through a partnership with a bank, along with other invoicing and procurement services, advisers at KPMG, PwC and Hackett said.