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  July 10th, 2024 | Written by

Supply-Chain Financing for Some, but Not All 

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High interest rates are pummeling nearly every facet of the economy. Yet one area that typically performs well in elevated interest rate environments is now also being re-examined, especially by firms with the cash flow to choose alternative routes.

Also known as vendor financing, supply chain financing is short-term in nature. It allows buyers to hold their cash for longer and pay invoices at more comfortable intervals. Another favorable point of this type of short-term financing is that it is typically not counted as debt on corporate balance sheets. 

Yet, with rising interest rates, what was once a cheap form of financing is no longer available, and liabilities have essentially reached their breaking point for many firms. During the pandemic, supply-chain financing was everpresent. The vendor’s invoices were paid by a third party, typically a bank, and the company then paid the bank the invoiced amount, but normally at a later date. The company’s credit rating determines the bank’s cut. 

The corporate supply-chain finance market exploded to $1.8 trillion in 2021, up 38% from the previous year. In all fairness, most companies turn to supply chain financing in elevated interest rate environments. If a buyer’s credit, for example, is higher than the supplier’s, supply-chain financing lessens the vendor’s need to consider higher-cost financing elsewhere. However, with companies with ample liquidity, a supply-chain finance program can introduce unnecessary volatility in the company’s cash flow. Moreover, once the company stops using this type of financing, the exit can result in a major cash flow hit. 

Public companies like AT&T and others are always seeking to simplify. By paring back on supply-chain financing obligations AT&T is eliminating messy variables from its cash flow and projecting forward with increasing certainty. Additionally, firms the size of AT&T have the financial position to be able to put together direct supplier financing programs or traditional supply-chain financing where an AT&T vendor sells its receivables directly to a financial institution.

Companies will always want to ensure their key suppliers remain in business. Supply-chain financing checks this box, but the complexities it adds, especially in high-interest-rate environments for large companies, present more liabilities from an accounting and shareholder perspective.