The Suppliers Dilemma – How to use Large Customer Receivables for Working Capital

I love when the so called users of supply chain finance sing its praises. PJ Bain, CEO of PrimeRevenue, recently penned a piece on Valuing the Upside Impact of SCF for suppliers and had some great quotes from companies.

Kiddyum, a maker of frozen children’s meals, called its program “an absolute lifeline” during a high-growth period when they signed U.K. grocery giant Sainsbury’s as a customer.  Electrical Components International (ECI) CFO said, “In a time of financial catastrophe for many companies, supply chain finance provided us the cash flow we needed to weather recessionary times.”

That’s good value. And I am sure if more companies could go public with statements, they would. But that is the day and age we live in.

But I do wonder the case of companies that have a concentration of receivables to a few large enterprise customers. As more industry sectors roll out supply chain finance programs (eg. Mining, Telecom, Aerospace, etc.) it will become more common for a middle market company to have a concentration of sales to a few of the large buyers within the sector.

So if I have $500mn in sales and $170mn go to Pepsi, Coco-Cola and Nestle, do I want to use their supply chain finance programs or do I want to leverage those receivables into financing that I can control? That is not a question for me to answer, but recent research I conducted indicated many middle market companies do not want to be part of multiple programs.  Dollar General, CVS, Home Depot, etc, approach the company who finds it difficult to manage four or six finance programs versus going to an ABL lender or a bank.

But perhaps what outweighs the control issue is the fact that if you are selling to strong balance sheet customers, their collective weighted average cost of finance is less than what you can get from a middle market lender. So if a combination of Pepsi, Coca-Cola and Nestlé's is priced at Libor + 225, and my revolver is Libor + 450, at $170M that adds up to $3.825M in pre tax interest savings, nothing to sneeze at for sure for a $500M company.

So you see, these decisions cannot be done in a vacuum, and every case and supplier is different.

It’s just great we have more and more options for early pay finance for companies, as this should lower the interest costs throughout the supply chains.

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First Voice

  1. Sam Moore:

    Classic example of either A) Selling AR to your lender, or B) Using early pay organized by your customer. How many banks are actively offering A these days?

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