We’re living in a global economy. Raw materials mined in China are shipped to factories in Kenya and then the finished goods are sold in U.S. and Western European stores, among other global trade connections. It’s this globalization—and the recent credit crunch of the financial recession—that drives renewed focus on working capital management. You can’t run a business without working capital, and as buyers look to extend the value of their capital through deferred payment terms and suppliers aim to get paid quicker, you can run into significant issues.
Enter supply-chain finance. As a practice, the idea of supply-chain finance is designed to mitigate risk in accounts payable and extend the usefulness of your working capital. It used to be perceived as only for small and mid-size firms or those with poor credit ratings, but lately many healthy organizations and large multinationals have looked into the tactic to unlock liquidity and improve their capital utilization.
The market impact is tremendous—stringent new banking regulations and conservative credit models make buying what you need challenging—and supply-chain finance alleviates the sort of financial pressure that’s become so common in recent years. It’s also great for suppliers, who can confidently receive payment on any schedule they need. Buyers, meanwhile, can take their time to fulfill invoices by working through a third-party funder that will fill early invoices at a discounted rate and provide more favorable payment terms.
The value proposition of supply-chain finance is clear. For buyers, the financial supply chain becomes more predictable because your key suppliers have greater financial certainty and a better position to fill orders on time. For suppliers, cash flow becomes steadier and working capital requirements are immediately reduced. Suppliers can even seek early payments if they need to, and buyers will experience a reduction in processing costs.
Companies like Nipendo, which offers a cloud-based supplier network, provider clear opportunities for success in the supply chain finance arena. Nipendo in April 2014 announced a partnership with Integrate Financial to offer dynamic discounting capabilities and supply chain finance to customers using the Nipendo supplier cloud product. Solutions like Nipendo’s offer the chance to make your corporate balance sheet work for you, which is critical now more than ever.
Credit has remained tight since the global recession, which provides a consistent future value for supply-chain finance programs. Greater buyer/seller collaboration, which is a hallmark of these programs, can significantly mitigate financial challenges related to working capital. If a supplier is confident they’ll receive payment before a traditional 60-day timeframe, they can more confidently book business and use credit lines for other critical needs.
The three-party relationship of supply-chain finance—bank, buyer, and supplier—offers a clear methodology to improve working capital management. In the increasingly global economy, making the best use of your working capital is critical. Suppliers can ill-afford to wait for net-60 payments when they need capital for other business, and buyers with tight credit lines sometimes need extended terms to make final payments. Financial freedom is the true watchword of supply-chain finance, and that’s what makes everyone win.