A tale of Vendor side Supply Chain Financing. When it comes to Supply Chain financing, there are many options a company can use to collaborate with their suppliers. On one occasion I was lucky enough to see an example where a large manufacturer was able to use their Banking relationship and solid balance sheet to help some of their suppliers finance the large orders. What would be great is if our system was able to extend financing agreements like this deeper into the supply base without charging super high rates like those of a factoring agent. To do something like this, we would need to develop an objective way to score and assess the financial viability of any given transaction. The scoring mechanism would need to take into account the size and scope of the order as well as the creditworthiness of both the buyer and the supplier. It would also need to be able to evaluate past transaction history between the two groups.
I think I can hear it now….. If you build it …they will come.
Ok, on to the Vendor Side Supply Chain Financing story
Once upon a time, there was a Fortune 500 company, which has a business unit created as a bottling unit for beverages. The company has many vendors – mostly transporters (service providing vendors) and raw material suppliers which include bottle suppliers, metal cap vendors and suppliers of perishable items.
The client in this particular case is much larger in revenue terms as compared to his vendors. In fact, for some suppliers, he accounts for all of their sales. For this reason, the client enjoys generous payment terms from the vendors. The client purchases material from his vendors and makes the payment about 60 days later.
However, the client’s actual working capital cycle is slightly longer, and the product also has a seasonality component which delays his collections at times. Also, his vendors currently find it difficult to remain out of funds for 60 days. To bolster their Balance Sheet and also get some extra credit period, the client wants to implement a Supply Chain structure.
Normally, in such situations where the buyer has more bargaining power, any interest that is to be paid to a financier is borne by the supplier. However, in this particular case, the client wanted a hybrid structure where he was willing to share part of the interest burden with the suppliers (and thus save on tax as well). The difference would be adjusted in their purchase price.
A Vendor-side Supply Chain Financing structure was created with about 20 vendors to be on-boarded under the program initially. These would include both the transporters and the raw material suppliers. The total credit period offered would be 120 days, with the vendor bearing the interest for the first 30 days and the balance 90 days of interest to be borne by the client. Limits per vendor were capped at around USD 5 million, with no underlying collateral other than the transaction.
The transaction would be initiated by the client who would upload the details of an invoice in the bank’s online portal. The vendors would also log on and verify the transaction, and this would send the transaction request to the bank for funding within a matter of minutes. The underlying documents would be the accepted invoice and transport documents which could be uploaded to the bank portal but would be archived by the vendors for periodic bank audit on a sample basis.
The client had given a debit authority to the bank to debit their account on the 120th day and settle the transaction. The debt authority provided the bank with the comfort they needed since the client was AAA rated and also allowed the bank to offer a very attractive interest rate which the 20 vendors would not have been able to get on the strength of their own Balance Sheets.
The bank established further relations with the suppliers, offering them additional products like wealth management to the owners, salary accounts for employees and so on. The client also managed to get a large portion of his amount payables off his balance sheet. Given the structure, all three parties – the client, the vendors, and the banks were better off than what a traditional banking product would have offered.
Moral of the story
The best way to insulate your supply chain and reduce risk is to treat your supplier like partners. Take the time to communicate with them to articulate your needs and listen carefully to theirs and magical things can happen. Manage your suppliers well and they will take good care of you.
Once this Vendor-side Supply Chain Financing plan was deployed, they all lived Happily Ever After.