How Supply Chain Financing can Improve Cash Flow in 2017

Many companies are seeing it as a green light to invest more aggressively in their own growth through new projects, M&A activity and innovation initiatives. That’s driving up demand for working capital.

In a survey conducted by CFO Research and TD Bank, nearly 75% of finance executives polled expect their company’s liquidity needs to increase over the next two years. Fifty-seven percent of respondents cite supporting growth as the primary reason.

In other words, companies are ready to chase the growth opportunity that awaits them next year, assuming they have fuel in the tank. This puts cash flow optimization at the top of the CEO’s list of priorities and challenges. How CEOs respond will have meaningful implications for growth. Conventional tactics like direct lending are becoming a less attractive solution as interest rates rise. With the cost of debt expected to rise, companies need to go beyond the banks to increase cash flow.

One tactic is supply chain finance. Supply chain finance programs are helping companies unlock billions of dollars in working capital each year. A two-pronged approach, supply chain finance extends supplier payment terms, then offsets the impact on suppliers by allowing them to trade the full value of their receivables with funders participating in the program for immediate payment (minus a small transaction fee). Both the supplier and company are able to drastically improve cash flow.

Supply chain finance also happens off the balance sheet—and that’s a tremendous advantage. Conventional funding methods like raising debt or traditional factoring increase debt-to-capital ratios, which can have a long-tail impact on the financial health of the company. Supply chain finance programs, on the other hand, are structured so that transactions aren’t classified as debt.

There are two important considerations when implementing a supply chain finance program. The first is whether to use a single-funder or multi-funder approach. While some large financial institutions offer supply chain finance capabilities, they come with risk.

No one bank—no matter how global—has the processes and systems in place to serve all necessary currencies and jurisdictions. This is an important factor to consider given the breadth of most global supply chains. If a company implements a supply chain finance program led by a single bank, and that bank can’t serve key suppliers in certain parts of the world, the efficacy of the program is diminished.

This is why best-in-class supply chain finance programs are based on multi-funder platforms— rather than closed, bank-proprietary platforms.

The second consideration is program requirements. Many supply chain finance programs are designed to serve only investment-grade companies, their top tier suppliers and large-scale financial institutions. That makes many supply chain finance programs and services inaccessible for mid-market companies. If your business falls into this category, it’s important to find a program management partner that works with non-investment-grade or unrated companies, and has the ability to support all your suppliers, not just the large ones.

In 2017, CEOs will be measured by how well they seize opportunities for growth. The ability to increase cash flow will be part of that assessment. Supply chain finance provides a low-cost, off-balance sheet alternative to support growth for companies and their suppliers.