Why Offering Supply Chain Finance Benefits Buyers
There are many discussions about the benefits of supply chain finance for suppliers. Now its time to talk about why offering supply chain finance benefits buyers. Like suppliers, buyers are looking to reduce their costs while addressing the need for working capital. However, buyers hold the power in most trading relationships. After all, they can often negotiate the price: if the price is unacceptable, a buyer has the option of choosing another supplier.
Supply Chain Challenges of Buyers
Buyers have a focus on preserving cash. The simplest way to hold on to cash longer is to extend supplier pay terms anywhere from 30 days to, in some cases, 90 days later. Many organizations have enhanced their balance sheets in this manner. For CFOs of buying organizations, this raises an important question: how can cash surpluses be used most effectively?
Buyers have the continual need for working capital and being able to pay for materials and supplies after they have had a chance to realize profit is important for maintaining working capital, fiscal stability, and long-term profitability. With more working capital, buyers have greater opportunity to expand operations, hire staff, explore new markets, and assess performance on meeting corporate objectives.
On the other end, cash-poor buying organizations are in a difficult situation. The actions of buyers directly affect the financial status of suppliers, especially smaller suppliers. But the health and stability of a supplier are critical to the stability of a buyer. In fact, buyer revenue and both short and long-term performance are directly tied to suppliers.
Sourcing strategies can drive cost out of the supply chain, forcing some buyers to rely entirely on a small group of strategic suppliers. Even when a buyer is financially sound, has extensive cash reserves, and has effectively managed its working capital, a failure of the supplier could cause significant, even crippling setbacks. A stable, financially-strong supply chain is therefore crucial to buyers.
Why Supply Chain Finance Benefits Buyers
With supply chain financing, a buyer is able to address specific business needs by leveraging extended payment terms to suppliers. They maintain working capital, enhance their financial stability, and expansion opportunities.
Supply chain finance benefits buyers because there is an increased return on cash available for short-term investments. With the right supply chain finance program, buyers offer suppliers quick pay discounts using third-party capital. This creates a new revenue stream for the buyer and frees up cash for major projects. In short, supply-chain financing turns accounts payable and shared services into profit centers, instead of burdens on the bottom line.
The benefits to suppliers are also implicit benefits to buyers. The stability and cash flow provided by supply chain financing have a rippling effect throughout the supply chain, increasing efficiency and potentially reducing risks to buyers. In turn, this results in greater supply chain stability, which enhances efficiency and potentially reduces costs to buyers. With a base of suppliers working with supply chain financing, the risk of disruptions is reduced.
In addition to increased revenue, there is also reduced risk to the suppliers, especially tail suppliers that buyers so heavily count on. Yet another benefit includes the improvement to the utilization of AP services and increased ability to serve a broad spectrum of supplier profiles. Supply chain financing can also bolster corporate social responsibility by helping companies adhere to government mandates involving small business lending and minority-owned businesses.
Most important of all, supply chain finance brings greater peace of mind. When procurement knows that their suppliers can withstand financial storms, they have greater confidence to seek new opportunities. They can continue to work with the assurance that their business will last. Success takes hard work, dedication, and foresight; with supply chain financing, the chances of long-term sustainability are increased.