Commercial Insights

Use supply chain finance to increase working capital

Working with select vendors within your supply chain can bolster your working capital and benefit the suppliers as well.

As a business executive or owner, you know that customer demand exerts tremendous pressure on operations and, in turn, the supply chain that supports those operations. And without an optimized supply chain, it’s nearly impossible to work at peak efficiency.

One element of your supply chain relationships that may be in particular need of optimization is its finance: the invoicing, terms, and payment details that can affect working capital and cash flows for you and your suppliers alike.

Enter supply chain financing.

Unlike traditional supply chain management, which emphasizes the flow of material and information, supply chain financing represents the financial end of operating an efficient supply chain. It’s a relatively new type of financing that can free up working capital while shoring up relationships with your most valued suppliers.

Sometimes known as reverse factoring, supply chain financing can provide working capital to growing businesses. More specifically, it provides suppliers the opportunity to sell their accounts receivable, which benefits both suppliers and customers in numerous industries.

What is supply chain financing?

Initially the province of large companies, supply chain financing has gained momentum among midmarket enterprises that have similarly built out broader, more complex supplier relationships.

Supply chain financing is essentially a means to allow sponsor companies extended payment terms by giving suppliers the opportunity to sell receivables. Dan Wells, Managing Director, Regions Business Capital, describes the supply chain financing process in four steps:

• A company sponsors a supply chain financing program, identifying key supplier partners for the program.
• The sponsor company asks the key suppliers to extend invoice terms, freeing up working capital for the sponsor company.
• The suppliers that accept the extended terms are allowed to piggyback on the sponsor company’s credit profile, which is often better than the supplier’s and can help reduce the supplier’s cost of capital.
• The company sponsoring the program gets more time to pay while allowing the supplier to get paid immediately by selling their receivables to banks.

Many businesses may benefit

If your company has complex supplier relationships and doesn’t actively manage its supply chain, including the related finances, the implications can be considerable — even for the most successful businesses. However, implementing a supply chain finance model can help business owners manage daily operations and even help generate some unexpected funding, in addition to improved working capital management by the sponsor companies without tying them up with debt financing.

To discuss how to optimize your financial relationship with your valued suppliers, contact a Regions Commercial Relationship Manager today.