Today’s suppliers can’t wait for customers’ cash to come through before buying raw material, firing up the assembly line or loading up the cargo container. Financing is required every step of the way. Everyone depends on a steady and reliable stream of capital to keep the machines running.
But some companies in the chain may have an easier time accessing capital than others. A well established U.S. buyer might access a bank credit line at 1-2 percent per annum, while its smaller Chinese or Vietnamese supplier may be fortunate to get credit at 8-10 percent per annum. This disparity adds to costs and often affects the financial stability of valued suppliers. One solution is vendor financing, in which a buyer helps a supplier get credit at the buyer’s lower rate. In exchange, the supplier may agree to wait longer for payment.
An electronic platform can add to the appeal of vendor financing, where the bank/NBFC absorbs the payment risk of the transaction and gives the supplier the option of being paid as soon as the buyer approves the invoice. The bank/NBFC then collects funds from the buyer on the maturity date of the invoice based on the new payment terms that buyer and supplier have agreed upon.
The arrangement speeds up the cash conversion process for both supplier and buyer. The supplier gets faster and more dependable payment at the discounted rate. The buyers get to keep their cash longer on their balance sheet. And thanks to the automation and visibility provided by the platform, both sides reduce effort on the collection and payment process.
The next generation of cloud-based platforms will enhance supply chain management through data analytics –which can provide predictive insight –and open collaboration between partners. Sophisticated platforms can allow companies to obtain working capital based on recent performance history, which may be faster than having to wait for a credit review.
Predicting cash flow is key to managing the cash conversion cycle. Another solution –cash pooling –is especially valuable for companies that manage cash in various locations throughout the globe. With cash pooling, cash from all operations is pooled into a single account at the end of each day. That makes it easier for companies to forecast their cash or collection positions and redeploy cash quickly where it is most needed.