New Models of Business Credit Still Require Understanding of Framework

Understanding business credit should start with the different layers that enable credit to occur. Most of us like to jump to the latest finance technique without a consideration of how these layers fits into the collective business credit picture for a company.  Of course, depending on whether you are a micro business, a small business, a $500M distributor, or a global brand, access, pricing, and other considerations differ, but the underlying infrastructure issues do not.

Over the next several posts, I will examine the infrastructure framework for business finance in the context of helping all of us navigate the changing options companies will have in the future as we move to a more digitized world.

I see four layers:

  • Infrastructure Layer
  • Business & Accounting Layer
  • Services Layer
  • Tools Layer

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

Before we get into the layers, it is important to view trade credit through a macro view of the value chain. Macro is defined as order to financial settlement (functionally):

Figure: Simplified Value Chain Map


Most people are familiar with this high level value map. You order goods, they are produced and shipped, the seller, manufacturer or distributor invoices the buyer, and payment is made. It all sounds so simple.  What’s not hard to understand?  But in my prior post – Banks Lack Understanding of Detailed Supply Chains - understanding how goods are made is not a simple exercise. Selling money through various supply chain finance techniques without having a fundamental understanding of the chain you are funding is dangerous.

The issues around trade credit and supply chain finance are very challenging. It used to be the customers would provide payment terms so they could receive and check goods before payment, and receive some form of discount from their sellers if they paid earlier.  Not today.  Customer demand for trade credit requires sellers to provide free and flexible funding for their customers, which is not economical for most businesses.

Payables represent the largest source of capital for many businesses, and increasingly, companies stretch payables even further to manage working capital. While Accounts Payable is a free loan, it needs to be balanced with supplier relationship and cost of goods sold.

Figure: Trade Payables and Corporate Bonds represent a significant portion of Corporate liabilities compared to Loans and Commercial Paper


So why does infrastructure matter?   We all know there is a tremendous amount of PR and BS flying as new finance solutions come to market brought by analytical whizz kids who do not fundamentally understand FASB, or the UCC, or markets, asset classes, cross border regulations,  etc.   When it comes to business finance, many of these things matter, fraud, dilution, bankruptcy, etc. does not go away because of new tools and techniques.

Next week, I will take a look at some of these Infrastructure Layers.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

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