The chairman of Vayana Network provides information on how factors/ ABL might plan to grow their supply chain finance portfolio.
A significant disconnect has been noticed between large corporations and their small suppliers and vendors; particularly when it comes to financing their businesses. There is no one to blame for the two operate in completely different environments.
The fact is that most large corporations have no trouble receiving financing from banks even when they are in trouble. We have all seen large banks and Wall Street finance institutions syndicate large credit facilities to rescue failing Fortune 500 companies and there are multiple reasons for this, but that story is for another time. This very crucial and time-critical safety net is completely foreign and out of reach for small-to-medium enterprises (SMEs).
It comes down to risk vs. return, the ticket sizes, and cost of acquisition and servicing; the costs structure of big banks make it a no-play zone. Recent statistics show that 82% of small business application were declined by banks across the country, making it easier to become a Navy Seal than for an SME to obtain adequate financing from their financial institution!
Most banks are reluctant to finance even some of the most promising and profitable businesses in the SME category. It comes down to risk vs. return, the ticket sizes, and cost of acquisition and servicing; the costs structure of big banks make it a no-play zone. Recent statistics show that 82% of small business application were declined by banks across the country making it easier to become a Navy Seal than for an SME to obtain adequate financing from their financial institution!
Over the years I have worked with many of these innovative entrepreneurs who will do anything within their power to establish supplier relationships with a financially strong, large corporation as a buyer. The bottom line is that they do not want to look weak to the buyer. This behavior is driven by the fear that their customers will drop them for a competitor and the irony is that the competitor is in the exact same situation. The buyer just doesn’t know it. To remedy this challenge, many small businesses resort to one toxic loan after another to Band-Aid their situation until they are left with zero profit or negative equity; and unfortunately, many times go out of business. One could argue that this is a drain on the economy, weakens the supply chain, and the buyers lose the capability and capacity of the supplier that goes out of business. It does not have to end this way.
Buyer’s Missed Opportunity
A supply chain is only as strong as its weakest link. When suppliers do not have adequate cash flow due to a slow payment cycle, it can affect product quality, deliveries and cause unnecessary friction between the two parties, ultimately ruining what could have been a great business relationship.
This leaves the buying organization in a position where they are continually spending capital and company resources seeking out new suppliers that will do things the ‘buyers’ way’. But, as mentioned before, most suppliers may do and say everything a buyer wants to hear at the onset just to get a buyer’s business. Unfortunately, there is no magic formula and the odds are high that this new supplier is faced with the same challenges as the former and the cycle continues, ultimately resulting in continuous cash restraints and jeopardizing product quality, timely deliveries, goodwill and the benefits of having a loyal and capable vendor network that can grow with the buyer.
Supplier’s behavior is often guided in ensuring that they, on their own, deal with their internal issues including cash flow to support the orders from the buyer. This poses a continuing challenge causing a sense of anxiety leaving little mind space to handle KRAs such as quality and timeliness with innovation getting short shrift. Suppliers need to be educated on their vital role in the buyer’s supply chain. They should be encouraged to have the confidence to collaborate with the buyer on finding solutions that strengthen their link to the supply chain. The supplier’s dilemma remains on how they bring up the issue of cash flow without impacting their flow of orders. This is further exacerbated in an environment where the buyers are pushing suppliers for extended terms, impacting supplier working capital. Then there is the additional pressure of seeking price reduction which impacts the supplier’s ability to innovate and their margins unless they can gain efficiencies from their downstream suppliers by providing cashflow support. There has to be a better way.
The Fortune 500 Way
Walmart is an excellent example of a global organization that uses Supplier relationship management to increase profitability. With a business mantra of ‘Everyday Low Prices,’ the retailer leverages on healthy supplier relationships to negotiate prices and hence pass the benefits to customers in the form of low product prices.
In 2015, Walmart introduced a supply chain finance program. Initially, some long-time suppliers were uncomfortable or even upset with the program. However, the benefits of improved cash flow soon won these suppliers over. The legacy suppliers recognized that their business with Walmart was evolving and there were advantages to the new program.
The goal of developing better supplier relations through SCF is not only to minimize business risks and reduce costs, but also to ensure that high-quality goods are delivered. When a buyer has the supplier’s best interest at heart, the kindness is likely to be reciprocated through high-quality products. Every supplier dreams of selling to an established, long-term buyer.
The success of Walmart’s program has enabled them to keep overall costs low, which they pass onto their retail customers. Walmart remains the dream buyer for many small and medium enterprises. The company attracts a considerable number of suppliers and is known to retain its best for long periods of time.
Supply Chain Finance – A Pathway to Addressing the Gap
Supply chain finance (SCF) is a form of trade credit historically only available to Fortune 500 companies until very recently. You can structure an SCF program as an “off balance sheet” inventory procurement and vendor payment line that allows a Buyer to purchase product from vendors around the globe while increasing working capital for growth and expansion. Now the buyer can utilize the same strategy that CFOs at Walmart, Raytheon, Home Depot and the like are using. SCF can enable buying organizations to extend their payment terms, increase credit limits and reduce cost of goods while their suppliers can accelerate cash flow through early payments.
Supply chain finance refers to a program that aims to build supplier-buyer relationships by offering and participating in a mutually beneficial early payment plan. In SCF, a buyer offers early payment on invoices, in exchange for a discount from the supplier. Buyers often use a third-party financing organization to manage the payments. This allows the buyers to optimize their working capital while paying the suppliers faster. Suppliers are very eager to accelerate their cash flow, and participation in SCF programs is generally high. The result is better working capital, improved relationships between parties, and a stronger supply chain.
The goal of developing better supplier relations through SCF is not only to minimize business risks and reduce costs, but also to ensure that high-quality goods are delivered. When a buyer has the supplier’s best interest at heart, the kindness is likely to be reciprocated through high-quality products. Every supplier dreams of selling to an established, long-term buyer. When the opportunity comes, no Supplier will risk destroying it through poor quality products or service. If suppliers have consistent, dependable working capital, they can focus more on improving service or the quality of their products. That’s the power of supply chain finance.
Some Thought Starters
The best way that buyers can build quality relationships with their suppliers is by offering them tools to manage their working capital. Supply chain finance is one of the best tools buyers can use to ensure supplier working capital needs have been met and improve their bottom line. Banks, non-bank finance companies, factors and fintechs can play a valuable role in facilitating this collaboration through making financing and transaction platforms available and investing in enablement of buyers and suppliers in their journey into SCF.