At the end of 2020, international analyst house Gartner found that some 23% of organisations rely on supplier finance as a means of increasing cash flow. However, this figure appears to leap in the past year, according to research from tech firm Taulia, which found that two fifths (38%) of businesses now rely on this form of funding, double the number it saw in 2018.
Without a doubt, supplier finance is an increasingly attractive model to large businesses and their suppliers, who are liquidity-strapped as the global economy faces the challenges brought on by the pandemic.
As major dislocations throughout global supply chains continue, it is difficult to anticipate the issue going away anytime soon. There is an ongoing headache for many Chief Financial Officers (CFOs) looking to identify which supplier finance model best supports their cost strategies. Added to that are the potential regulatory and other risks.
Supplier finance is an increasingly popular form of funding with new fintech solutions bringing together suppliers and buyers. Key to these solutions is optimising working capital and tightening the payment window — something critical for smaller suppliers.
However, as you would expect, any CFO looking to supplier finance must weigh up the potential costs and the benefits and associated risk. The CFO, therefore, must choose a type of supplier finance that supports their border financial strategy and be very aware of the disclosure requirements with auditors to avoid any regulatory or reputational risk.
Supplier finance, often referred to as reverse factoring, trade finance, accounts payable discounting and more, is an agreement between a buyer and seller that structures the financing of goods in a way that helps generate working capital for both parties. Providers of such a solution include Fintechs and banks.
CFOs will need to disclose and report it to external auditors no matter how it is labelled.
What is of critical importance to CFOs is the cost of supplier finance. Larger corporate buyers tend to have a higher credit rating and this, in turn, is essential as it will facilitate cheaper finance than if a supplier had sourced it. Both parties can therefore share the added benefit: buyers get extended payables terms; suppliers lower the cost of financing based on leveraging the buyer’s lower cost of borrowing.
No CFO will adopt supplier finance without being aware of the reputational and regulatory risks associated with supplier finance. CFOs need to be clear on reporting operating cashflow adjustments, which directly involve any material extension of payables durations. It is, after all, a financial risk equivalent to short-term debt. Furthermore, a business’s ability to switch between direct payments or supplier finance could very well obscure a cash flow dynamic, and that may cause concern for regulators.
To be clear, when a struggling business uses supplier finance, it can transform balance sheets and cash flow (be that of a buyer or a supplier) to benefit both parties.
CFOs, therefore, need to look at supplier finance with fresh eyes as both a short- and long-term solution to liquidity challenges.