How Procurement can use Unsecured Payable Finance to Secure Volume Discounts

While the pricing for Investment grade Supply Chain Finance program (or Reverse Factoring market) is ultra competitive with yields as low as Libor + 70bps, the sub-investment grade space has largely been ignored. Some banks have put their toe in the water to leverage their distribution and origination capabilities but few have really ventured aggressively in this space.

There are lots of opportunities to help sub investment grade companies with an unsecured payables facility but few do not want to take the risk of not having secured liens on a supplier.

Procurement organizations have an opportunity to take advantage of volume discounts or quarter end spends with their largest suppliers but may not want to tap into their revolving credit facilities.   A provider of an unsecured payable facility can step in and sign a deal with a large buyer to pay those 3 or 4 suppliers as required.

The sweet spot for these propositions tend to be large distributors and technology companies that may source parts and components and have hundreds if not thousands of suppliers but have a few that represent significant spend. A B+ or BB- rated company can do an unsecured deal for two or five of their big suppliers in a few days and a lender can take a promissory note from them in 60 days, all without involving the supplier. Lenders don’t need to sign any paperwork with the supplier, just pay them.

I’ve written about this in the past and you do not hear much about this space. A B+ rated company may have a large credit facility with their relationship banks that only costs them Libor + 300bps but they don’t always want to tap into this facility.

While this unsecured line will probably cost more, it provides a means for large buyers to not tap their facility for this purpose. The additional costs of the unsecured credit can be offset by the volume discounts.

I believe we will see more of this, particularly as all the big boys are chasing investment grade deals and driving prices down to what are unsustainable or very low profitable deals.

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