Newton wasn’t thinking of finance, when he wrote the third law of motion: “For every action there is an equal and opposite reaction.” Even so, this is often what happens in cash management. 

Purchase cards

When purchase cards were introduced in the USA, the additional cost to the suppliers was some 2-3% (taking into account faster receipt of the funds and the merchant service charge of 3-4%). However, there is a lot of anecdotal evidence, that, over the next 1-3 years, suppliers not only increased their charges by 2-3% to compensate BUT ALSO lobbied to be paid by ACH. 

Supply chain financing

Reverse factoring is well established in MNCs world-wide as a technique to extend their payment terms. The FT and the WSJ have had articles about how companies have reduced their working capital by $100s millions.

Reverse factoring benefits big buyers directly by extending their DPO and they can show how much working capital it has saved. But the impossible data to collect or measure is how does term extension come back in higher prices?

Not only this, if MNCs are really serious about caring for and protecting their suppliers, they need to carryout an open and fair analysis of the overall position of a supplier poarticipating in their programme. One of benefits of this could be that suppliers won’t try to increase their charges to compensate for the costs of your ’so called’ attractive financing programme.

Although some supply chain finance programme may seem fairer to the supplier than others, it is up to the buyer to convince the supplier that it really is fair, because, as David Gutin in Trade Financing Matters, put it, “Because if you create a win for your Treasurer by extending DPO, you may eventually have to deal with a loss for your Procurement department as you have less payment leverage due to the extended terms.”

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CTMfile take: As we said in a previous post, “Late payments by large companies are a cancer, costing jobs & inhibiting recovery”, I.e. protecting suppliers is essential. The full impact of new payment systems and/or financing needs to be considered. For those using purchase cards or operating supply chain finance programmes, do you know whether any of your suppliers have:

• increased their prices to compensate for the extra costs?
• moved their focus to other suppliers to avoid such charges?