Financial supply chain management tends to focus on a horizontal path, monitoring cash flow from order to delivery through to final payment. However, these days it is critical for buyers to be aware of the potential financial risk their suppliers face. Such financial difficulties may impact timely delivery of goods or services buyers need to ensure continued operation. Constantinides calls paying additional attention to suppliers' financial health "vertical awareness."
T&R: What should companies do first? Constantinides: Gauge your suppliers' financial health. A supplier's financial information is often difficult to determine but it's important to know if your supplier is adequately capitalized and able to deliver.
T&R: What are some of the best ways to look at suppliers' financial health?
Constantinides: Adequate access to working capital is key to your suppliers' financial health. There are several clues that may help a buyer. For example, a supplier's bank might be more willing to provide financial support if buyers are supporting their orders with Letters of Credit (LCs). Ask yourself if LC terms could help them to secure/collateralize their sales book and improve cash predictability. Look at your suppliers' other customers–reduced or cancelled orders could cause cash flow problems by leaving suppliers with unsold inventory. If possible, find out if terms offered to other buyers are compromising a supplier's cash cycle. Finally, consider whether a supplier has a solid and stable banking relationship.
Recommended For You
T&R: How can companies work with their suppliers?
Constantinides: Don't assume financial supply chain risks for functions that aren't your expertise, such as providing direct financing for work in process. However, do identify suppliers' financial condition and seek to provide support without assuming direct financial risk.
T&R: What kind of support can buyers offer?
Constantinides: Despite today's credit market, trade continues to be financed under sensible and appropriate terms. Support your suppliers' need to access working capital (WC) finance by considering a temporary return to traditional terms such as LCs, or even Time LCs, which are a widely accepted financing tool. LCs offer suppliers the enhanced comfort that comes from securing the order flow and the ability to offer the LC to their bankers to collateralize export sales. LCs can provide discipline, visibility and risk mitigation tactics that benefit all parties.
T&R: What if you have invested significantly to move toward structured open account terms?
Constantinides: Over time, as buyers and suppliers have developed a relationship, there has been a logical progression toward open account (OA) terms and reducing the use of LCs. Generally speaking, OA terms have been great for buyers, who gain more direct control over managing payment terms while reducing bank line usage, but can be challenging for suppliers, whose access to working capital finance may be diminished without the bank support provided by LCs. If your suppliers are already trading with you on OA terms, you might consider shortening payment terms. Remember a supplier's ability to perform is dependent on its ability to effectively manage its financial performance, something buyers need to consider and be aware of but not own or control.
Simon Constantinides heads U.S. trade business development for HSBC's trade and supply chain business. Based in New York City, he has spent the last 20 years advising retailers, apparel and consumer product companies on traditional trade finance and open account alternatives.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
