Anxiety over access to cash is being punctuated by a working capital drought. One analyst firm estimates the global shortfall of working capital is more than $2 trillion. In response, organizations are optimizing their working capital positions by extending days payable outstanding (DPO) and lengthening the payment terms offered to suppliers. However, this strategy can place significant pressure on suppliers, who may suffer from their own working capital drought.  

More U.S. companies are now exploring the benefits of setting up a supply chain finance program, which can reconcile the competing goals of buyer and supplier and mitigate the impact of a DPO extension strategy. Using supply chain finance, a large buyer invites chosen suppliers to obtain early payment at a cost of funding based on the buyer's credit rating, rather than their own. The benefits can be substantial; in some cases, suppliers may be able to access working capital funding at a cost of 3 percent APR instead of 14-18 percent.

Companies in Europe have been using supply chain finance for some time—particularly in markets such as Spain and Italy. Companies have routinely offered long customer vendor payment terms of 90, 120 or even 180 days, noted Todd W. Yoder, director of global treasury for engineering and construction company Fluor. "In the U.S., however, this type of program has only recently gained traction as an attractive proposition, driven by the more challenging lending environment," he said.  

To benefit fully from a supply chain finance program it is important to avoid four pitfalls. 

Set out your goals

Vendors will design and execute supply chain finance programs based on a company's needs. Buyers should therefore have a clear understanding of what they are trying to achieve—whether that's injecting liquidity into the supply chain in order to remove financial risk, extending supplier payment terms, or deploying company cash in the program to generate returns.

Understand your market

All too often, companies set an objective without really understanding whether their supply chain can support that objective. For example, not all companies will have the negotiating power to impose an extension of payment terms on their supplier base. It is therefore important to undertake a spend analysis, working capital analysis and terms benchmarking exercise to understand what payment terms the market will bear.

Involve the right stakeholders

In order to succeed, supply chain finance programs should be set up in consultation with multiple stakeholders around the organization. "I recommend booking time with the CFO and presenting your plan," Yoder said. "Getting the right stakeholders to the table often involves one key lead, and to get that person, you'll need to demonstrate why your program is a good investment, and who should be involved in sustaining those returns in the long run." 

The procurement function plays a critical role in the success of a supply chain finance program; with a clear understanding of the needs of suppliers, procurement can have a strong and positive impact on the program's outcome.

Procurement can also advise on key queries, such as:

• Which suppliers should we approach with an early payment program?
• When did the last contract negotiation with commercial terms take place?
• What type of negotiation culture does the company practice?
• Do any of the company's suppliers present significant risk exposures?

Leverage technology

"Treasury has the opportunity to utilize low-yielding capital to build stronger, more efficient, win-win relationships across the entire supply chain," Yoder said. "Intelligent software can help treasury get the critical information needed to develop the optimal strategy that not only utilizes capital more efficiently, but also reduces risks at the same time."  

Technology has a key role to play as supply chain finance programs become more sophisticated. Implementing a supply chain finance solution requires integration between the company's ERP system and the vendor's platform, and between the company's payment systems and the vendor's platform. Solutions which offer supply chain finance as an extension to an existing treasury management system tend to provide a faster and more streamlined implementation.

"Corporate treasury is facing perplexing times with pressure on margins, and favorable yield is hard to find," said Yoder. "This makes an effective supply chain capital deployment strategy more important than ever before." 

Eric Riddle is the EVP of Supply Chain Finance Solutions at Kyriba.