Financing the Chain

As new services come to market, finance executives are taking a second look at supply-chain finance.

With thousands of suppliers shipping everything from furniture to toys to its 1,400 stores, Big Lots Inc. has long prided itself on its supply-chain management. But until recently, the closeout retailer had a few weak links in what might be called its financial supply chain — the flow of money that supports the movement of products. “We recognized quite a while ago that there were some inefficiencies in the financial supply chain, and that we were paying for those inefficiencies,” says treasurer Jared Poff.

Many of the company’s small and midsize suppliers were struggling to access capital to run their own businesses, says Poff. Frequently, they would factor their receivables to enhance their cash flow, often at a significant discount to the cash value of the receivables. That gave their competitors a big advantage, he says, because “if there were two vendors sending us the exact same product, but one had much easier access to capital and lower borrowing costs, it could potentially force the other out of the running.” Consequently, the remaining vendor could charge a higher price for the product.

In addition, vendors’ borrowing costs, which could be as high as 18 percent, typically ended up reflected in the price of the product, ultimately increasing the cost of goods for Big Lots. “We thought, ‘There’s got to be a way for us to let vendors compete on their ability to make the product and not on their ability to access financing,’” says Poff.

After reviewing multiple offerings from banks and other vendors that tackled only pieces of the problem, last December Big Lots settled on a Web-based service that Poff hopes will address suppliers’ need for quick cash and lower the retailer’s own cost of goods, or allow the retailer to secure longer payment terms. As soon as Big Lots approves a supplier’s invoice, that invoice is posted on a system run by PrimeRevenue, a third-party service provider based in Atlanta. The supplier, which can see all of its approved invoices online, can choose either to wait for full payment or to sell the invoice to a bank or other financial institution that participates in the PrimeRevenue network and receive cash as soon as the next day.

What’s more, the supplier’s receivable will be discounted based on Big Lots’s investment-grade credit rating. Because the invoice has already been approved, the financial institution considers the risk to lie with the buyer. “They know that their ability to get paid really depends on us,” says Poff. PrimeRevenue then directs Big Lots to pay the bank. PrimeRevenue itself takes a percentage of the financing fee charged to the supplier.

In addition to providing cheaper access to capital, the system also removes uncertainty for suppliers, who often don’t know that a payment will be late until a check fails to turn up, sending them scrambling for cash. “Not knowing when you’re being paid, especially for a smaller supplier, can impact the ability to buy raw material or pay your own suppliers. It has a really intense domino effect,” says Beth Enslow, supply chain practice leader with Aberdeen Group. The ability to see when invoices have been posted and approved enables suppliers to better plan for their own cash needs, which can benefit buyers because suppliers will have the flexibility to extend payment terms more readily. “Right now, they have to buffer themselves against uncertainty by holding on to cash and not extending payment terms,” says Enslow.

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