Adjusting to the “new reality”, many companies have focused on all aspects of their balance sheets to improve performance for stakeholders. Companies have realized that material extensions of credit terms regarding its accounts payable result in dramatic improvement to cash flow and working capital. Changing terms from 30 days to 75 days, for example, not only frees up cash for working capital, it also reduces the need for bank financed working capital, which is more expensive than “borrowing” from suppliers. To make the extension of payment terms more appealing to suppliers, buyers have partnered with their lenders to offer a “supply chain finance (SCF)” solution that allows suppliers to be paid timely if not early, despite the stated payment term extension, such that a suppliers’ DSO is actually reduced.
The Trade Credit Association of the United States reported that in the U.S. approximately $20 trillion of annual sales are made on trade credit, resulting in $2.8 trillion of trade credit outstanding in the U.S. economy, which creates a substantial marketopportunity for banks to generate interest and fee income. These numbers would undoubtedly at least double or triple if you added the U.S.’s main trading partners including Canada, Mexico, the EU, China and Japan.
Originally Published In Eurofenix - Winter 2013/14.
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