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Alternatives for Monetizing Trade Payables (or Receivables)

Heres how to distinguish between the three primary approaches to supply chain financeand when to leverage each one.

By Massimo Capretta | Updated on October 22, 2015
As anyone who regularly deals with supply chain issues knows, buyers and suppliers of goods and services usually have conflicting interests. Supply chain managers at most companies are under pressure to improve the company’s cash efficiency, usually by extending payment terms to their suppliers. But many suppliers lack the financial strength or flexibility to adjust to longer payment terms. For example, if a supplier already has a highly leveraged balance sheet, increasing bank borrowing to finance short-term working capital may be prohibitively expensive. Extended payment terms may also expose suppliers to increased commodity or foreign exchange risk.

When a large, well-capitalized company is buying goods or services from a small or highly leveraged supplier, it may be in a position to use its own balance sheet to support the supplier. A number of strategies have emerged in recent years to help buyers and suppliers leverage the buyer’s stronger financial position to help the supplier access lower-cost liquidity, often so that the supplier can then offer the buyer extended payment terms. Most of these strategies involve monetization of the supplier’s trade accounts receivable.

The most common forms of trade receivables monetization include open-account–based supply chain finance and negotiable-instrument–based supply chain finance. Together, these two strategies are often referred to as “structured vendor-payables finance” or “reverse factoring.” A third, related strategy is non-recourse receivables purchase, which is often incorrectly referred to as “factoring.”

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