Supply Chain Finance programs find unlikely Anchors– State Governments

imagesIf you are a Vendor to any Municipal, State or the Federal Government, you know getting paid can be PAINFUL!  Well, if you are a vendor to the State of Illinois, it can even be risky.  The nation's fifth-largest state is running an estimated $7 billion behind on bills for everything from Medicaid reimbursements to doctors to plates purchased for prison mess halls, forcing some vendors to wait six months or more to get paid.

But a new program put in place for about a year to deal with the chronic late payment from the State is now helping many vendors.  Citibank, in conjunction with Vendor Assistance Program LLC has stepped in.

By law the State of Illinois must pay a 1% penalty for invoices not paid after 90 days.  Last year, Illinois paid a total of more than $85 million in late fees.  Illinois payment terms are 270 days (they really need their cash), so think about suppliers waiting up to nine months to get paid.

Here is where Citibank steps in.

  • The State sends Citi an Excel file of approved invoices – they are approved so the dilution risk is manageable.
  • Citibank than advances 90% payment up front (this is on Day 90, not the day when the invoice is approved).
  • When the State pays 100% on the Invoice to Citibank on Day 270, Citi advances another 5% to the Vendor
  • After a period of time, the State will pay the Late Fee and Citi will release the final 5%. Thus the vendor gets its full 100% of the funds, and Citi makes money off the fact that the State of Illinois paid 105% of the invoice value.

Sources say the program currently has about $300M outstanding, so it does have good take-up.  Whats interesting is Vendors still have to wait 90 days just for the program to quick in.  I am sure there are opportunities to do something with those invoices.

Are other States considering such a program?  Probably, but Illinois payment terms and penalty laws do put it in a special category.  It has the lowest credit rating of any state, and its pension shortfall of $96.8 billion is by some estimates the largest in the nation

Hopefully, more vendors will find solutions to long Government payment terms.

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