October 2020 | Commentary | COVID-19

Solving Distributor Liquidity Shortages

Tags: Distribution, Finance

The pandemic is inflicting financial hardship on the supply chain—from manufacturers down to the end consumer—with particular pain for distributors, who are the critical intermediary agents responsible for delivering goods from producers to retailers and other businesses that sell to consumers.

Maureen Sullivan, Managing Director and Head of Supply Chain Finance, Mitsubishi UFJ Financial Group (MUFG), 973-301-8434

Like many companies, distributors face liquidity shortages following the supply/demand dislocation brought on by the outbreak. To alleviate the strain on their cash flow and retain sufficient working capital to sustain ongoing operations, a growing number of distributors are trying to negotiate more favorable terms with their counterparties—namely, the ability to render later payments to suppliers who sell them products on one hand, and collect earlier payments from buyers to whom they sell products on the other.

However, plenty of manufacturers, retailers, resellers, and other companies that work with distributors face a similar squeeze. The reasons vary, but most of them trace their roots to the pandemic.

For example, excess demand for certain goods has overburdened suppliers' production capacity and drained them of working capital. In other cases, lower demand for goods has caused income shortfalls among suppliers and buyers alike. And physical disruptions in the manufacturing or delivery of goods have triggered delayed payments.

Pressed between both struggling ends of the supply chain, distributors can only negotiate so far. What are they to do? The answer may lie in their receivables.

Tapping receivables for liquidity

Receivables are legally enforceable claims for payment held by a business for goods or services that customers ordered but have not paid for. These claims usually take the form of invoices issued by a supplier and delivered to a buyer for payment within an agreed upon time.

Since cash-starved suppliers cannot always afford to wait the full 60- or 90-day payment terms set with their buyers, some enlist in supply chain finance programs, which enable them to sell their receivables to a program provider, such as a bank, in exchange for immediate cash. The program provider then collects payment from the buyer at the later date in accordance with the payment terms established between the buyer and the supplier. Suppliers gain quicker access to the money they are owed—money that would otherwise be inefficiently suspended until collection is due—while buyers get the time they require to pay off their balances.

The benefits of a supply chain program extend to both buyers and suppliers. Suppliers can use it as an alternative source of liquidity. At the same time, buyers are equally concerned about their suppliers' solvency, because their businesses rely on a smoothly functioning supply chain with no interruption. To no surprise, more buyers are enlisting their suppliers in supply chain finance programs as a consequence of the pandemic.

A buyer-led program links a single buyer with multiple suppliers, automating transactions and tracking invoice approval and settlement processes between the buyer and supplier. In this type of program, the buyer agrees to approve its suppliers' invoices, which are then sent to a banking partner that may provide the supplier with early payment. Similarly, a supplier-led program links a single supplier with multiple buyers.

Supply chain finance programs are not for everyone. Some companies have effective financing lines in place, while others may prefer direct negotiation of payment rendering and collection terms on the basis of personal relationships.

Distributors in virtually all industries are focused on optimizing their working capital to survive. For many, tapping receivables for cash may be the solution.






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