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Our Business Development Director Clinton Foy looks at who stands to benefit when a construction firm runs a supply chain finance programme and how buyers and suppliers can minimise risk.
Finance heads mostly focus on the working capital benefits that come from the accounts payable term extensions associated with a supply chain finance programme, but this isn’t the only advantage. When a successful supply chain finance programme touches several different departments internally and externally, the buyer and its suppliers can extract a range of benefits.
As the Global Trade Review notes, the collapse of Carillion in 2018 reflects the dangers of a poorly structured and executed supply chain finance programme with a single funding source and the extension of payments terms too far beyond the industry standard in conjunction with a firm’s financial instability.
How can this scenario be avoided? To mitigate risk when implementing a supply chain finance programme, a construction firm should look for a supply chain finance provider with a deep pool of global funders (rather than a single funder) and a well-structured programme to support both the corporate buyer and its suppliers and the long-term sustainability and financial health of its end-to-end supply chain.
Here is an overview of how a well-structured and executed supply chain finance programme can positively impact your firm and your suppliers and contractors.
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BENEFITS FOR BUYER
Treasury
Finance costs: The supplier, not the buyer, is charged for early payment of invoices.
Yield on dormant cash: The short recovery cycle allows treasurers to fund or pull cash on demand, generating a yield from Treasury reserves. Rates will be higher than those available on the open market.
Increased liquidity: The buyer has the potential to extend payment terms without adversely affecting the financial stability of the supplier.
Reduced debt costs: Excess working capital can be used to settle debt, reducing long term finance fees.
Accounts Payable
Improved invoice approval process with automation: Suppliers are notified when approved invoices are loaded and available for finance, decreasing the likelihood of non-filed invoices.
Reduced payment risk: Crossflow’s supply chain finance portal takes over responsibility for payments processing, reducing risk and limiting fraud.
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Procurement
Reduced supply chain risk: By providing suppliers with the option to access early payment, a supply chain finance programme helps suppliers strengthen their cash flow.
Reliable supply chain: Suppliers receiving prompt payment for their goods can maintain their own supplier network therefore provide a consistent service to the buyer.
A supplier centric negotiation tool: Discounts offered to buyers are weighted against inexpensive finance fees, turning debt into cash and improving their balance sheet.
Improve supplier growth prospects: By offering off balance sheet finance to suppliers, a supply chain finance programme enables suppliers to access working capital without having to source funds from banks, investors or retained earnings. Suppliers align their growth with buyers’ demands by releasing working capital.
Securing top tradesmen: Skilled contractors prefer dealing with a customer who pays on time or early. As a result, they will become more reliant on the buyer as a customer of choice.
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BENEFITS FOR CONTRACTORS AND SUPPLIERS
Treasury
Improved working capital: Firstly, contractors and suppliers can be provided with the option to seek early payment as a means of raising working capital. This can be very attractive, particularly for smaller companies, as this finance is not subject to their own financial standing and can often be available at cheaper rates on the strength of the buyer’s creditworthiness as opposed to traditional methods such as overdrafts.
Preserve credit lines: In addition, contractors or suppliers’ own credit lines can be available for other purposes or to improve balance sheet strength.
Low-cost financing: Contractor and supplier access to affordable finance is critical to lowering the overall cost of finance in the supply chain. A well-structured supply chain finance programme will provide suppliers with access to working capital finance that is priced on the investment grade risk profile of the buyer.
Cash flow control and flexibility: Suppliers can manage cash flow more effectively as invoices in a supply chain finance programme will be paid on time by Crossflow. Suppliers can align the use of the supply chain finance facility with buying trends to align cashflow with production cycles.
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Accounts Receivable
Reduce credit exposure risk: By selling their client exposure to the financier, suppliers can reduce their credit risk, allowing them to seek out new customers and grow their respective market share.
Procurement
Negotiate discounts: The improved liquidity means suppliers can approach their network of suppliers to access early settlement discounts and increase margin.
Next level suppliers: Base material suppliers are strengthened from the flow of capital from buyers to suppliers, as they receive earlier settlement from goods supplied.
Clinton Foy is Business Development Director at Crossflow. He has worked closely with business owners over the last 6 years, introducing them to alternative banking solutions when raising working capital. He has experience working with construction and retail industry firms. He is passionate about developing fast-growing specialist fintech firms, previously with Retail Capital in South Africa and now Crossflow in London.
