Supply-Chain Financing for Some, but Not All 

High interest rates are pummeling nearly every facet of the economy. Yet one area that typically performs well in elevated interest rate environments is now also being re-examined, especially by firms with the cash flow to choose alternative routes.

Also known as vendor financing, supply chain financing is short-term in nature. It allows buyers to hold their cash for longer and pay invoices at more comfortable intervals. Another favorable point of this type of short-term financing is that it is typically not counted as debt on corporate balance sheets. 

Yet, with rising interest rates, what was once a cheap form of financing is no longer available, and liabilities have essentially reached their breaking point for many firms. During the pandemic, supply-chain financing was everpresent. The vendor’s invoices were paid by a third party, typically a bank, and the company then paid the bank the invoiced amount, but normally at a later date. The company’s credit rating determines the bank’s cut. 

The corporate supply-chain finance market exploded to $1.8 trillion in 2021, up 38% from the previous year. In all fairness, most companies turn to supply chain financing in elevated interest rate environments. If a buyer’s credit, for example, is higher than the supplier’s, supply-chain financing lessens the vendor’s need to consider higher-cost financing elsewhere. However, with companies with ample liquidity, a supply-chain finance program can introduce unnecessary volatility in the company’s cash flow. Moreover, once the company stops using this type of financing, the exit can result in a major cash flow hit. 

Public companies like AT&T and others are always seeking to simplify. By paring back on supply-chain financing obligations AT&T is eliminating messy variables from its cash flow and projecting forward with increasing certainty. Additionally, firms the size of AT&T have the financial position to be able to put together direct supplier financing programs or traditional supply-chain financing where an AT&T vendor sells its receivables directly to a financial institution.

Companies will always want to ensure their key suppliers remain in business. Supply-chain financing checks this box, but the complexities it adds, especially in high-interest-rate environments for large companies, present more liabilities from an accounting and shareholder perspective. 

Source link

Register at Binance

Scroll to Top