One of the largest obstacles preventing supplier growth, especially for SMMEs, is the lack of funding from traditional sources. With restrictions to finance, suppliers may be forced to pay high interest rates with local money lenders or approach banks to discount invoices.
However, a financing alternative lies in a multi-bank supply chain finance platform, which enables suppliers to sell buyer-approved invoices at competitive discount rates based on the creditworthiness of the buyer, says Emuel Schoeman, director of supply chain finance organisation Propell. In this month’s SmartProcurement Schoeman looks at a few buying organisations that have leveraged their creditworthiness to assist their suppliers.
Growing suppliers consume a lot of working capital, which puts strain on existing funding sources and could eventually influence production, order fulfilment and ultimately supplier/buyer relationships.
With restrictions to finance, the creation, growth and maturity cycle of SMMEs undergoes immense pressure. Moreover, cash flow shortages caused by lengthy or delayed payment cycles exacerbate this problem, says Schoeman.
An alternative lies in suppliers selling approved invoices at competitive discount rates based on the creditworthiness of the buyer.
Buyers load approved supplier invoices onto a cloud-based platform, giving suppliers the option to sell these invoices to a number of pre-approved financial institutions at highly competitive finance rates.
Case studies
A LARGE RETAILER was struggling with working capital after investing a large amount of cash in new shops and inventory to support its rapidly growing business, placing significant pressure on existing funding lines, which was beginning to influence the company’s credit rating adversely. To help absorb the cash flow pressure created by its higher volume purchases, the retailer requested extended payment terms (by 30 days) from each of its suppliers. To mitigate the impact of extended terms on the suppliers, the retailer implemented a supply chain finance programme, which enabled suppliers to be paid immediately for delivered goods.
The finance programme gave suppliers full transparency into approved invoices, payment certainty and access to 24-hour funds at a discount rate cheaper than their own cost of funding in most cases, allowing many suppliers to reduce existing debt and actually improve the financial health of their own businesses.
A MULTI-NATIONAL TOBACCO COMPANY successfully implemented a supply chain finance programme, an extension of which offered financial support to some of its tobacco growers by pre-approving invoices amounting to half their annual tobacco harvest, nine months before delivery. This allowed the growers to fund their input costs by selling the approved invoice via the platform based on the lowest discounting rate from multiple banks. In the process the multi-national company effectively gave their growers access to trade finance through their supply chain finance programme.
A LARGE CAR MANUFACTURER realised the importance of supporting its suppliers financially when a strategic supplier’s bank funding lines were withdrawn. This brought the supplier’s production to a standstill, preventing it from filling client orders, which halted the car manufacturer’s production line – the specific supplier was the only source of a specific component. The buyer supported the supplier to ensure integrity of supply until it established a multi-bank supply chain finance programme, at which point numerous banks stepped in and continued to support the car manufacturer’s suppliers financially.
In short, suppliers are paid earlier, at a competitive discount rate, improving cash flow and working capital efficiency.
To learn more about how you can implement this in your organisation contact Emeul Schoeman on Emuel@propell.co.za.
