When Your Suppliers Swim in (Loan) Shark-Infested Financing Waters

When I first started researching and covering procurement, it was rare to find an article in a popular newspaper or magazine about the area. But now, it seems to happen at least once a week. Just this weekend, The New York Times published a highly insightful piece on the high-interest, high-stakes world of purchase order financing. According to the story, "It is a relatively new line of business ... and a twist on the ancient and much larger practice of factoring, in which a business sells an invoice at a discount to get its money faster, providing the factoring company with a hefty fee." But, "Purchase-order financing, though similar to factoring, is further up the financial food chain. Purchase orders are written guarantees from a buyer that it is committed to purchasing a product. By financing purchase orders ... [the lender] essentially pays the factory to manufacture the goods."

All of this sounds useful enough. After all, purchase order lenders are stepping in where banks are stepping out. But the APRs involved are enough to spell trouble for suppliers operating on already thin margins. How high? Try a typical "3.5 percent for the first 30 days, and 1.25 percent for every 10 days after that, an annualized percentage north of 40 percent." Yes, you read that correctly. Suppliers are paying over 40% APR to obtain credit in a situation where the lender's risk is reduced because they're dealing directly with a supplier’s supplier.

If your suppliers are forced into this type of financing arrangement on a regular basis, it's high time you explore dynamic discounting options to step in -- potentially with the help of a bank or third-party providing liquidity off of your own credit rating -- and become a better partner to your suppliers by offering a lower APR for early payment on previous invoices (not to mention potentially turning your A/P group into a profit center in the process). Prime Revenue, Oxygen, Ariba, The Receivables Exchange, Orbian, OB10, Demica and Tradecard are all providers to consider in this area.

Jason Busch

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