By: Stephen Perl, MBA, MS
Often businesses grow and mature and do not even realize that their growth is being inhibited from the lack of understanding Supply Chain Financing. Simply put, Supply Chain Financing is the efficient use of working capital to finance goods as a part of a larger process.
Working capital is crucial or another way to state it, “Cash is King!” in the Supply Chain. Business like people are creatures of habit and the initial way of conducting business is often kept as long as possible because it’s comfortable, but placing cash to purchase critical inventory from your overseas buyers is often not the best use of working capital. Invoice Factoring or Accounts Receivable Financing and Trade Finance are more efficient methods of leveraging existing assets to increase cash-flow and thereby sales.
Invoice Factoring in your Supply Chain Financing process is often performed by businesses that understand the importance of a company’s value. “Increasing sales by proper use of financing allows a management team to execute its most important task… to increase shareholders’ value,” states Mr. Stephen Perl, CEO 1st PMF Bancorp. By utilizing invoice factoring, a company can leverage existing receivables to facilitate additional sales cycles without waiting for the receivables to pay in the normal NET 30 to 60 day terms. The additional working capital can be placed by into the Supply Chain to finance additional inventory and/or services to generate additional sales.
Trade financing is also an important element in the Supply Chain Financing process. It is often ignored by companies looking to increase cash-flow. Letters of credit (aka LCs) provide financing that does not even create debt on the balance sheet (this is often called “Off balance sheet financing.”). LCs are very useful but unfortunately, difficult to obtain without cash and strong credit from the large traditional banks. On the other hand, Letters of Credit are essential to the supply chain as a business grows. LCs from many respects are very necessary when business becomes large as it secures payment, quality and timing of goods with limited risk to the buyer(s).