The current economic climate is forcing many companies to better manage liquidity. Supply chain finance can be an attractive way for companies to improve their working capital position whilst also having a positive impact on earnings before interest, taxes, depreciation, and amortization (EBITDA). With a move towards near-shoring and stabilization, inventory increases are putting pressure on costs, prompting an acceleration in demand for supply chain finance solutions.

What is Supply Chain Finance?

Here is the simplest answer: supply chain finance is an agreement where a customer partners with a financial institution (i.e., a bank) that will then pay suppliers on the customer’s behalf. After a business buys something from the supplier, the customer can request an early payment and the financier will quickly pay them less a small fee. The purchasing company then pays the funder at a future agreed-upon date.

The central benefit of supply chain finance is that suppliers can be paid in a matter of days and customers will get longer terms than those provided by the supplier. This can strengthen the financial position of both parties by increasing cash flow and working capital. Companies may use this option only as necessary, like during slow seasons (if they experience seasonal spikes and dips in demand).

Why SCF Is Increasingly Popular Across Many Industries

While early adopters of supply chain finance were largely in the retailing and automotive industries, the strategy is now taking hold across sectors such as manufacturing, electronics, consumer goods, food and drink, pharmaceuticals, distribution, heavy equipment, and more.

In addition, supply chain finance is no longer being driven exclusively by large corporate buyers. With the vast majority of trade being conducted on open account terms—and companies of all sizes focusing on working capital metrics—middle-market companies also have good reason to consider the strategy.

What’s more, some financial technologies are beginning to focus more on selling supply chain finance services to middle-market buyers. They’re making their services more attractive to these types of buyers by offering easy-to-implement programs that don’t require significant technology investment.

These fintechs focusing more on the middle market are also often willing to accommodate smaller transactions and program sizes. Historically, importers face challenges funding inventory purchases and supplier deposits (cash outlays that occur up to six months before consumers pay them for goods). Especially for growing businesses, there are few appealing options available to address these shortfalls. For example, banks might hesitate to finance DTC brands due to their relatively shorter operational history, unique business models, and lack of accounts receivables, while customer cash advance providers charge high interest rates and equity investors dilute existing shareholders and business owners.

Is Supply Chain Finance The Right Strategy for Your Business?

With companies focused more intently on working capital, interest in supply chain finance has soared. But, how do you know if facilitating supply chain finance is appropriate for your business?

You can start by assessing your company’s working capital performance. A metric many companies use is the cash conversion cycle, which takes into account three “levers” they can adjust to improve working capital (Days Sales Outstanding, Days Inventory Outstanding, and Days Payable Outstanding):

DSO + DIO – DPO = cash conversion cycle number

Companies seek to improve working capital by lowering their cash conversion cycle number, which requires adjusting one or more of the three levers.

To determine if supply chain finance might be an appropriate strategy, calculate your company’s cash conversion cycle number. How do you need to optimize that working capital metric to be competitive in your industry?

Then ask: Could your company optimize working capital by increasing DPO? Given DPO norms within your industry, do you have the flexibility to seek extended terms with more of your suppliers? If the answer is yes, supply chain finance may provide an opportunity.

Here are some other questions to help you decide if supply chain finance is right for you:

• Do you have suppliers coming to you wanting to be paid faster?
• Do you have suppliers in financial distress that may need to be paid earlier to keep supplying you with the materials you need to run your business?
• Could many of your suppliers benefit by leveraging your credit rating to achieve much better financing rates than they could get on their own?
• Where are your suppliers based? Are they based in countries that lack well-developed capital markets where financing rates are typically high?

Recognizing Opportunity

In today’s primary economy, customers want to take longer to pay to preserve working capital, suppliers want to get paid faster. One of the ways both parties can benefit is through the intercession of a third party offering supply chain financing like Flexport Capital.

Companies can use the internal cash flow that supply chain finance generates for many purposes, including funding capital improvements, engaging in stock repurchase programs or dividend buyouts, reducing debt, and improving the cost of goods sold.

How Flexport Capital Is Revolutionizing Supply Chain Financing

In September Flexport launched the first truly all-in-one tool powering one-click access to financing, freight, fulfillment, and replenishment to all major marketplaces and retail stores.

Flexport Capital now offers access to industry-leading supply chain financing, priority shipping services, and easy access to supply chain experts to support their business. Flexport empowers entrepreneurs by financing, handling cross-border freight, fulfilling, and/or replenishing their inventory directly to the store or customer with minimal effort.

"We finally have a single pane of glass from which we can view and manage all our logistics and supply chain finance needs. This is the 'holy grail' for small businesses importing from overseas." – Nick Kushuba & Jason Trembley, Co-owners of Holy City Straw

Early on, Flexport Capital identified entrepreneurial and growing businesses as a notoriously underserved audience by traditional financing institutions. Banks typically will not lend in a meaningful capacity to small businesses that they consider to be too risky or too small for the underwriting effort.

In turn, these businesses often resort to funding their inventory purchases by having friends and family pitch in—thereby diluting equity value for founding teams—or borrowing from FinTech or customers cash advance (MCA) lenders. These alternative lenders offer broader access than banks do, but they often charge high APRs in the 30%+ range.

Four Things Flexport’s Supply Chain Finance Can Do For You

1. Optimize your working capital

Just as supply chain finance gives suppliers more working capital, it also allows customers to hold onto their money longer. More available cash means more working capital to invest in the business, like to capitalize on short-term opportunities.

2. Provide fast access and quick underwriting

Flexport Capital offers one-click access to 20+ supply chain services on a single page, enabling businesses to seamlessly sell in more places and automate the movement of their products from factory floor to customer door.

Customers can now drive sales at lower costs and radically reduce the effort needed to manage their entire supply chain. Unlike banks, Flexport Capital offers this self-service portal for customers to seamlessly submit a brief application to finance their inventory, freight, and/or customs broker costs, receive an underwriting decision within three business days, and then choose a repayment structure that suits their business. It’s as simple as that.

Customers can now drive sales at lower costs and radically reduce the effort needed to manage their entire supply chain. Unlike banks, Flexport Capital offers this self-service portal for customers to seamlessly submit a brief application to finance their inventory, freight, and/or customs broker costs, receive an underwriting decision within three business days, and then choose a repayment structure that suits their business. It’s as simple as that.

3. Offer you greater negotiating power

Another benefit of being a preferred customer is that you may be able to negotiate better prices or bigger discounts on large orders. That means bigger margins, particularly helpful at a time when profitability is of supreme importance. Negotiations could cover more than price—you may be able to get faster shipping times for the same price, for example.

4. Centralize your payments

One of the complexities of supplier management is remitting payments to a laundry list of companies. But if most or all of your suppliers join the supply chain finance program, all payments can be routed to the financer rather than to each individual vendors. This simplifies AP and could reduce the related work and costs.

Whether you're an entrepreneur shipping for the first time or a fast-growing business looking to scale, figuring out how to ship and deliver your goods takes a ton of resources, know-how, and time. Reach out to us today to learn more about our Supply Chain Finance solution!

The contents of this blog are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. We do not guarantee, represent, or warrant the accuracy or reliability of any of the contents of this blog because they are based on Flexport’s current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This blog has been prepared to the best of Flexport’s knowledge and research; however, the information presented in this blog herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this blog.