In late July, The New York Times published a story called Worried Banks Sharply Reduce Business Loans. The article examines the plight of two smaller suppliers attempting to obtain credit to finance business expansion (while also increasing operating capital to stay alive). If these stories are not perfect cases for supply chain finance and EIPP, I don't know what is. Here's why: both companies the article references are growing and need access to capital -- money that used to be easy to come by. But now it's not. Why? As banks like Wachovia are reducing credit lines and refusing new loans in certain industries, business credit -- especially for small and medium-sized suppliers -- is drying up.
Take the case of the CEO of a $20 million manufacturer in the article who has "been forced to limit his production to what he can finance with his existing cash flow supplemented by his own money ... [his organization] gets paid for its wares weeks after they have shipped, necessitating credit to finance the upfront costs of production -- raw materials, labor and transportation."
Or consider the situation of "Drew Greenblatt, president of Marlin Steel Wire Products, [who] figured [that] it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable. His expansion would add three new jobs to an economy hungry for work."
But when Greenblatt called Wachovia for a loan, a firm that he had been solicited by many times before, there exact words were: "We're saying no to almost everybody." This experience is similar to that of one healthy company that I knew was growing quickly but had its credit lines yanked out from under it by a local bank caught up in the credit crunch.
In all three of these examples, each organization would have certainly sacrificed fifty, one hundred or even more basis points to pull forward receivables on their own schedule -- without paying astronomical amounts to traditional factors (who behave more like loan sharks than financial institutions). But I doubt at this point that most of their customers are even aware that they have the opportunity to profit from the financial needs of their suppliers, let alone implement a supply chain finance approach to make it work. It's about time for this to change. Let's hope the banks and vendors alike begin a major push to educate the market.
- Jason Busch