In today's volatile economic environment, most companies are focusing on improving profits, maximizing liquidity, managing working capital and generating cash flow. Unfortunately, the pursuit of these objectives often puts companies at odds with their suppliers. However, supplier financing programs provide companies with a rare opportunity to improve their own financial strength while also providing meaningful benefits to their suppliers.
How do these programs work? Many suppliers offer, or would be willing to offer, discounts for early payment of invoices, and the aggregate effect of these types of discounts could have a significant impact on profitability, particularly in an environment where companies are experiencing razor-thin margins. Under a supplier financing program, companies enter into arrangements with financial institutions under which the company simply submits approved supplier invoices to the financial institution and the financial institution makes immediate payments to the supplier on the company’s behalf, maximizing supplier discounts. However, the company is not obligated to repay its financial institution until a later date and pays the financial institution an interest charge in exchange for the use of the financial institution’s cash.
Why would a company want to do this? In many cases, companies have access to funds under supplier financing programs at borrowing rates substantially below the rates that their suppliers would have to pay to their lenders. As a result, participation in this type of program allows well-seasoned companies to negotiate supplier discounts in exchange for immediate payments that often far exceed the buyer’s borrowing costs under these programs.
How can a company become part of a supplier financing program? The answer is simple: All major financial institutions offer these types of programs. Additionally, these institutions often have very deep supplier networks and typically provide powerful web-based tools that both companies and suppliers can use to monitor supply chain activity, enhancing visibility for all parties.
The benefits of participating in supplier financing programs are numerous for both companies and their suppliers, providing near-term opportunities for significant cost reductions and improved working capital.
Perhaps more important, these programs can strengthen long- term supply arrangement providing a foundation for long-term success.