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Looking to learn more about supplier finance? Whether you are a supply chain professional or a CFO, you’ll find this handy reference guide useful for understanding supplier finance.

Frequently Asked Questions

What is the difference between cash (liquidity) and cash flow?

In a broad sense, cash flow is the money going in and out of a company over a period of time, whereas liquidity refers to assets immediately available in cash. Companies often build up their liquidity reserves by maintaining positive cash flow over time, but the same can also be done on a smaller scale via cost cutting and supplier discounts.

What is working capital?

Working capital is a key performance indicator of an efficient supply chain. The formula for working capital is the the sum of current assets minus the sum of current liabilities. Assets consist of a company’s inventory, accounts receivable (A/R), securities, and bank balances. Liabilities include all money owed — accounts payable (A/P), notes payable, accruals, etc. For accountants and treasurers, the term “current” refers to liquefiable assets and liabilities (such as supplier invoices) due within one year. In most cases, a low level of positive working capital is considered optimal.

Why is supplier finance such an important issue right now?

The international financial crisis of 2008 was a turning point in the banking industry that led to a worldwide tightening of credit and lending markets. Corporations could no longer rely on banks for quick and easy loans on demand. An exceeding amount of pressure has been placed on corporate CFOs and treasurers to reduce their Days Sales Outstanding (DSO) and increase Days Payable Outstanding (DPO) across the board. Meanwhile, suppliers have been at even higher risk due to these same lending constraints, now with the added burden of lengthier payment terms. Supplier finance is a critical issue right now because it offers a pathway for corporations to increase their liquidity without jeopardizing the health of their supply chains.

Should I work directly with a bank to provide supplier financing?

Working with a single lender is a proven method to finance earlier supplier payments. However, the financial benefits to suppliers are limited by higher lending rates due to a lack of competition. Using a multi-bank solution results in more competitive lending rates that are only achievable in a free market environment.

What is SupplierPay?

The White House SupplierPay initiative aims to gain support among large corporations who are committed to giving their suppliers quick and affordable access to capital. The United States government views lengthy payment terms as a key barrier to small business growth and national productivity. Without quicker access to capital, suppliers cannot grow, hire, or make key purchases. There is no single mandated solution required in order to become SupplierPay compliant.

What is Supplier Diversity?

Supplier diversity is the cause of advancing business opportunities for certified minority business enterprises (MBEs). These include Asian, Black, Hispanic and Native American owned businesses. Many supplier diversity programs also feature a commitment to veteran, women, and LGBT owned businesses. The purpose of supplier diversity initiatives is to present business opportunities for groups that are historically underrepresented in the business world.

Acronyms & Meanings

Accounts Payable (AP) refers to unpaid invoices — the money that buyers owe their suppliers for goods and services delivered, but not yet paid for. Accounts Payable are liabilities.

Accounts Receivable (AR) refers to unpaid invoices — the money that suppliers have a right to collect for goods and services that have been delivered, but not yet paid for. Accounts Receivable are considered assets.

Basis Points (BPS) are a unit of measure used to describe a percentage of change in interest rates. One basis point is worth 1/100th of a percent, which can be written as .01% or 0.0001.

Dynamic Discounting (DD) is an arrangement between a buyer and supplier where the supplier may elect to be paid earlier than the invoice maturity date in exchange for a price reduction. The discounted amount is usually proportional to how early the payment is.

Days Inventory Held (DIH) represents how long it takes a supplier to turn its inventory into sales. This is also referred to as Days Sales of Inventory (DSI). Generally, suppliers want to keep this number as low as possible.

DPO

Days Payable Outstanding (DPO) refers to how long it takes a company to pay its suppliers for outstanding invoices.

Days Sales of Inventory (DSI) is the same as Days Inventory Held (DIH). Days Sales of Inventory represents how long it takes a supplier to turn its inventory into sales. Generally, suppliers want to keep this number as low as possible.

Days Sales Outstanding (DSO) is the average number of days that a supplier waits to receive payment from their customer (the buyer).

Enterprise Resource Planning (ERP) refers to software or systems that integrate various major aspects of one large business. ERP systems allow departments to see what other departments are doing, and communicate between them.

A Letter of Credit (LC) is a written guarantee issued from a bank to a supplier, stating that the supplier will receive a buyer’s invoice payment in full and on time. In the event of non-payment, the bank is responsible for covering any outstanding amount to the supplier. Letters of Credit tend to be expensive due to the manual nature of checking discrepancies in documentation, managing administrative costs, and navigating bureaucracy.

The London Interbank Offered Rate (LIBOR) is the internationally agreed upon benchmark for short-term interest rates among banks, updated daily in five different currencies. The 3-month U.S. dollar rate is often referred to as the “current LIBOR rate.”

Supply Chain Finance (SCF) is an automated, collaborative model for invoice payment that allows suppliers to be paid earlier using lender financing calculated based on the credit rating of the buyer.

Supply Chain Management (SCM) is the oversight of the entire parts and labor process — often involving many outside companies — that goes into producing a final product delivered to the end user. Key aspects of SCM include product development, sourcing, production, and logistics.

Working Capital Management (WCM) refers to the balancing act of managing current assets and current liabilities. Working Capital Management is critical because companies always need enough cash flow to pay off short-term debt and operating expenses.