Many companies are struggling with liquidity shortages due to the coronavirus pandemic. However, classic measures such as extending payment terms can spell doom for smaller suppliers. This serves no one’s interests. For many companies, Supply Chain Finance can provide a remedy. If implemented correctly, both parties benefit – supplier and buyer.
Where does Supply Chain Finance come into play?
With various programs, flexible platforms in particular provide a remedy for every liquidity situation. For suppliers, for example, the purchase of raw materials ties up a lot of capital – and not only in the automotive industry: “My company deals in nuts, and since we have to pay for them immediately when they are imported, liquidity is tied up in the form of raw materials. Due to Corona, we have little turnover but a high inventory. Additional liquidity is therefore absolutely necessary, but my company is still too young for bank financing. This is where an early payment program between us and our buyers, such as Traxpay offers on its platform, comes into play,” explains Mario Ebel, Managing Director of grocer Dreimal-F. “Dynamic Discounting is an efficient and easy-to-use tool for increased liquidity.”
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More InformationWe are all familiar with the typical cash discount of 2-3% for payment within a specified period. With Dynamic Discounting things are much more flexible, because a discount can be applied on any day –from day one up to the actual due date of the invoice – with conditions that are equally interesting for the buyer and the supplier. The supplier no longer has to wait until the end of the agreed payment period for their money and the buyer invests in their own added value. We see it as a win-win situation for both sides: stabilizing the supplier’s financing equals more robust supply chains.
Why choosing the right partners is key
If the buyer is unable or unwilling to use their own liquidity, Reverse Factoring comes into play: the buyer’s (house) bank(s) can buy invoices from the supplier, whose payment then is confirmed by the buyer to the bank. This gives the supplier the possibility to obtain liquidity – if necessary – by selling individual invoices or automatically all invoices to the bank(s). The buyer themself improves their liquidity situation through extended payment terms granted by the supplier.
In addition to the positive effects of securing liquidity and thus on the resilience of the value chain, SCF instruments deliver further benefits: SCF programs, which are generally designed to run for several years, strengthen the relationship between supplier and buyer. When buyers use their often-stronger credit rating and/or liquidity situation to support their suppliers, a strong basis of trust is created. This, in turn, supports greater flexibility in contract negotiations.
