Magazine article Business Credit

Surviving Disruption Debt-Free: What You Need to Know about Supply Chain Finance

Magazine article Business Credit

Surviving Disruption Debt-Free: What You Need to Know about Supply Chain Finance

Article excerpt

Many business leaders express cautious optimism when asked to describe their economic view of the next 12 months. While healthy consumer demand, strong markets and the current administration's pro-business agenda could be good news across the board, caution should be applied. The changing political and trade policy climate in the U.S., Europe and elsewhere could have long-tail implications on many businesses--especially those with global supply chains.

And then there's disruption. No industry is immune to the significant innovations that are changing how companies operate, compete, survive and thrive. One obvious example is Amazon. Most notably, the "Amazon Effect" has long since redefined the retail industry. Today, Amazon is having a similar impact on the information technology, logistics and entertainment industries. It's safe to assume that the executives at HBO or Microsoft couldn't have imagined this scenario 10 years ago.

As companies continue to respond to these dynamics, the need for improved cash flow and easier access to working capital is becoming more critical. The Economist Intelligence Unit reports that while most companies are confident they will be able to deal with the challenges and disruptions in their supply chain over the next 12 months, more than half of the 500-plus executives surveyed cited reducing costs as a top priority. Nearly a third of respondents identified the optimization of working capital and quicker receivable collections as areas in great need of innovation (30% and 31%, respectively).

Therein lays the real problem facing many businesses today. It's not the economy. It's not lack of innovative thinking. It is finding large sums of capital required to fuel innovation and the resiliency required to survive-and thrive--in a disruptive business landscape. How do you find $1 billion or more to fund infrastructure improvements to meet demand? Or $10 million, $100 million or even an acquisition to help you tap into new markets? Or R&D that will produce innovation?

Supply Chain Finance: A Smart Alternative to Debt and Operational Cuts

Traditionally, companies have had four options to access the cash needed to fund large-scale business improvements: deep cuts, new debt, equity or the selling of assets. The problem with these approaches is twofold. They typically deliver a negative impact on the business' operations or balance sheet, and they often fail to deliver the sum of capital required.

The solution for many companies should be supply chain finance. Supply chain finance improves cash flow by allowing companies to extend supplier payment terms while also offering suppliers a way to mitigate the effect of payment term extensions and to accelerate their own cash flow. Unlike traditional lending, supply chain finance does not increase financial debt.

The first step is for the company to initiate longer supplier payment terms--e.g., from 30 to 60 days. This allows the company to free up cash to use for strategic initiatives such as investments in R&D, infrastructure or merger/acquisition activity.

In the second step, the company gives suppliers a way to mitigate the impact of longer payment terms. Suppliers that participate in a customers supply chain finance program have the option to get paid early by a funder, often as soon as the day after an invoice is approved by a buyer. The supplier can accelerate payment on some, all or none of their receivables. …

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