As supply chains have become more complex and more globalised, businesses have developed a growing reliance on their suppliers. Despite this, suppliers in Australia and elsewhere are still forced to make do with long payment terms, and frequent late or non-payment issues. This is dangerous for everyone, including the paying business. Late or missed payments can have serious knock-on effects down the supply chain, causing liquidity issues and interfering with the operations of one or more businesses—which ultimately comes back to haunt the procurer. The more businesses are involved, the more can go wrong when cash flow is interrupted.
Supply chain finance is fundamentally about protecting both the procurer and their suppliers from these kinds of cash flow threats, but it doesn’t always work out that way in practice. This has been highlighted recently by Labor shadow minister Brendan O’Connor, who has requested an investigation into the misuse of supply chain finance products from the ACCC.
Specifically at issue is the practice of forcing suppliers to accept longer payment terms, which they can only remedy by offering relatively large discounts on invoices for early payment. This provides a short term benefit to the procurer, while placing additional financial pressure on the business’ supply chain, and jeopardising their long term success. Supply chain finance, though, is an essential part of doing business in a global economy. Those procurers who learn to best use it and other financing tools like it to protect their suppliers’ interests as well as their own will ultimately outcompete those who don’t.
Suppliers need financial reliability
Suppliers need consistent timely payment, both for themselves and for their customers. After all, a poorly funded supplier can hardly be expected to perform competitively, or to make their customers more competitive. This is difficult in a dynamic business environment, where the purchaser’s revenues—and their available working capital—can vary greatly from one quarter to the next. Supply chain finance products like those of Fifo Capital allow these smaller businesses to ensure that they get paid on time, no matter what. Their most important function in this respect is as a risk management tool, rather than just as a way to boost liquidity.
Supply chain finance isn’t just about early payment
In order to boost their own working capital by being paid early, suppliers are required to offer a discount on their invoice. However, the discount required is smaller, the nearer the payment is to the contractual due date. This means that, even if the customer is dealing with a cash flow problem, the supplier can secure payment from the financial institution slightly early, eliminating the risk of non-payment or late payment entirely. This affordably offers suppliers certainty of payment, giving them the freedom to spend their available capital more freely to drive innovation and growth, further improving their ability to serve their customers.
Using supply chain finance to address late payment times
Supply chain finance can improve payment times to suppliers without unfairly cutting into their revenues. In many industries, payment times of 20 or fewer days, as the government has implemented for itself, aren’t realistic. This is why some suppliers are still working with agonizingly long, but structurally necessary payment terms of 60 or 90 days.
However, this doesn’t mean that shorter payment times aren’t achievable. Supply chain finance allows these businesses to pay their suppliers far sooner. That’s because, when using Fifo Capital’s supply chain finance facility, procurers can defer their own payments up to 90 days after the invoice is issued. For example, if a supplier requested early payment after 20 days on an invoice that was originally due within 30, the procurer can still defer their own payment by an additional 60 days.
If they wish, the paying business can use this to pay much sooner, while lowering costs for the suppliers more than would be possible otherwise. Critically, choosing to do so makes them much more attractive to top quality suppliers, and gives them the ability to improve their suppliers’ cash flow without forcing them to find ways to pay earlier themselves. Maximising payment terms to force greater discounts out of suppliers, on the other hand, means sacrificing an important negotiating tool, and ultimately harming themselves.
Supply chain finance is here to stay
Like any innovative financing tool, supply chain finance offers a major competitive advantage to suppliers and procurers who apply it strategically. It allows businesses to stabilise cash flow for themselves, while also empowering their suppliers by quickly and reliably hydrating their operations with cash. This, in turn, makes those suppliers more competitive and resilient. As a result, all of the businesses involved, from the large procurer to the last business in their supply chain, gain an advantage.
Large businesses aren’t islands unto themselves, they rely on a large network of partners and suppliers in order to function and thrive in the long term. Those who use the tools available to them to benefit the entire ecosystem in which they operate will inevitably displace those who pursue more short term advantages.