The Morning Ledger: Supply-Chain Financing Opens Cash Spigot to Small FirmsBy James Willhite |
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Illustration: Mike Austin |
Good morning. Big companies often started taking longer to pay their suppliers in the years after the recession, as a way to help them manage their cash flow. That left the smaller suppliers in a lurch as they waited longer for payments to arrive. But more banks are stepping in to fill that gap with a roundabout method of providing cash known as supply-chain financing, Vipal Monga and Ruth Simon report. Though the banks have shown a limited appetite for making small loans in a direct fashion, supply-chain financing lets the banks earn some interest, while the smaller companies are able to receive payments more quickly. Here’s how it works: A bank buys the receivables of a company’s smaller supplier, and then pays those bills early. The supplier might get its cash in 30 days, for example, for bills due in 60 days. The bank charges the supplier interest in exchange for the early payment, but at a preferential rate. With the cooperation of the bigger company, the bank bases the interest charge on that company’s credit rating, rather than on that of the supplier. |
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