Companies Offer Supply-Chain Financing to Vendors as They Bulk Up on Inventory, Push Out Payment Terms

Date: Tuesday, July 26, 2022
Source: Wall Street Journal

More companies are offering supply-chain financing to their vendors, a tool that allows them to pay their bills later while also providing suppliers with faster access to cash.

Supply-chain financing can boost the cash position of both buyers and sellers. A third party, often a bank, pays a vendor’s invoices but takes a cut. The company pays the bank the amount that was due under the invoice, though at a later date than originally required. The bank’s cut is determined by the company’s credit rating.

Supply-chain snarls over the past two years have prompted businesses to home in on whether key vendors have sufficient cash flow to stay afloat after many companies delayed supplier payments during the early stages of the pandemic. As a result, vendors were paid late or not at all.

Companies in recent quarters have bulked up on inventory, putting pressure on their own working capital. That is leading some businesses to push out payment terms even further and launch supply-chain financing programs to bridge the gap. Rising interest rates also drive demand for supply-chain financing programs, as the programs provide suppliers with a relatively cheap source of cash.

The size of the corporate supply-chain finance market increased to $1.8 trillion globally last year, up 38% compared with 2020, according to estimates from BCR Publishing Ltd., a data provider.

Meanwhile, inventory levels at companies in the S&P 500 index increased 15% during the first quarter from a year earlier, to $1.13 trillion, according to data provider S&P Global Market Intelligence.

Large retailers and e-commerce companies often look to push out the payment terms on their suppliers if they have a lot of goods sitting on the shelf, said Jake Jacobson, a partner at professional services firm Ernst & Young. “Oftentimes suppliers aren’t being paid until the product is sold,” Mr. Jacobson said.

On average, companies in 2021 increased their days of payables outstanding to 62.2 days from 61.9 days a year earlier, according to a survey of the largest 1,000 U.S. companies by revenue from business advisory firm Hackett Group Inc. That figure has increased over the past decade.

Constellation Brands Inc., the maker of beer, wine and spirits including Corona beer and Svedka vodka, plans to launch a supply-chain financing program during its fiscal year ending in February 2023, it said in a June securities filing. The program, offered through a financial institution, will be available to certain suppliers and help them manage their cash flow, the Victor, N.Y.-based company said.

“We are still evaluating the impact of this program on future liquidity,” Constellation said in its filing. The company’s inventory increased 20% during the quarter ended May 31, to $1.66 billion, compared with the prior-year period. Its days of payables outstanding rose to 67 from 58 a year earlier and 52.9 during the period ended May 2020, according to FactSet, a data provider. A year earlier, before the pandemic, the company’s days of payables outstanding was 66.2 during the period, FactSet said. Constellation didn’t respond to requests for additional comment.

VF Corp. , which owns shoe and clothing brands including Vans, North Face and Supreme, began offering its program during the quarter ended Dec. 31, according to its annual report filed in May. The company temporarily suspended the program earlier this year and reinstated it in May. VF declined to comment, citing the quiet period ahead of its earnings release on July 28.

Inventories increased 34% during the quarter ended March 31, to $1.42 billion. The company’s days of payable outstanding declined to 32.8 from 38.6 over the same period, according to FactSet.

Companies see supply-chain financing as a way to ensure vendors have the cash they need so that goods and services can be delivered on time, said Paul Schuldiner, chief lending officer at Rosenthal & Rosenthal Inc., a nonbank lender. “It’s a way to get liquidity in the channels,” Mr. Schuldiner said.

Demand for supply-chain financing often rises when interest rates go up, said Josh Nelson, principal at Hackett Group Inc. For example, if a buyer’s credit rating is higher than the supplier’s, this type of financing reduces the vendor’s need to access higher-cost financing elsewhere. “With interest rates going up, it becomes a much more attractive option,” he said.

U.S. Bancorp, a Minneapolis-based bank, has doubled the size of its supply-chain financing business since the beginning of 2021, said Dan Son, head of global banking. He declined to specify the size of the total portfolio.

Companies have an interest in making sure their key suppliers stay in business, Mr. Son said. “Suppliers are a fundamental source of your day-to-day operations,” he said.

Supply-chain financing can help companies that are squeezed by inflation but unable to quickly offset the impact, said John McQuiston, head of structuring and program management at financial-services company Wells Fargo & Co. “It provides that additional cash flow flexibility,” Mr. McQuiston said. Wells Fargo’s supply-chain financing program has increased in size, he said, but declined to share details.

Companies typically record the amounts owed under their supply-chain finance programs as accounts payable, meaning the sum is not considered as debt like a traditional loan. The accounting treatment can make a company’s liquidity position appear stronger because it boosts working capital but not total borrowing.

Companies aren’t required to disclose whether they offer supply-chain financing, but the U.S. Securities and Exchange Commission asked select companies to share more details, as such financing can hide underlying risks from investors.

Greensill Capital, a U.K.-based provider of such funding, filed for insolvency last year.

The Financial Accounting Standards Board, which sets U.S. accounting rules, in 2021 proposed requiring companies to disclose key terms and the size of their supply-chain financing. The board is set to consider advancing the proposal at its meeting on Wednesday.


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