A few years ago, Whirlpool Corp. made a push to get extended payment terms from its vendor base. Instead of the prevailing 60-day terms, the Michigan-based appliance maker wanted to pay its suppliers in 90 days.
The benefits of such an arrangement to Whirlpool are obvious, as is the pain it could cause to many in its supply chain. After fielding some objections from its vendors, Whirlpool set up a program with PrimeRevenue that pushed back its payment schedule while at the same time getting its suppliers paid quicker and on favorable terms.
“It’s been an incredibly simple system,” says Eric Burge, an accounting manager at NIS Inc., a Davenport, Iowa-based company that does sub-assembly work for Whirlpool.
Ten days after NIS ships product to Whirlpool, its invoices are uploaded to PrimeRevenue, which provides a technology platform that brings together buyers, suppliers and funders—banks and non-bank companies that finance the supply-chain deals.
“At that point,” Burge says, “we have the ability to sell any or all of those receivables. We can sell all the invoices automatically or we can specify a dollar amount to be sold or we can manually choose which invoices are to be sold.”
Selling the invoices involves transferring them to the funder—in this case Wells Fargo Bank—at a discount. The magic of the process is that the financing is based on Whirlpool’s size and credit, yielding a lower interest rate for smaller suppliers like NIS.
“Trading partners increasingly want to transact on open accounts,” says Chris Bozek, head of Global Trade and Supply Chain Finance at Bank of America Merrill Lynch. “In transactions like this, suppliers are able to get cash from receivables early on and buyers are able to extend their payment terms while keeping their suppliers’ well-being in mind.”
Supply-side deals represent the traditional and most frequently seen species of supply-chain financing, notes Enrico Camerinelli, senior analyst at the Aite Group, a financial industry consultancy. “A large, credit-worthy, financially solid anchor company is able to provide a solution that helps its suppliers,” he says. But, he notes, financing schemes can be worked out at any stage of the supply chain, from procurement through shipping and distribution.
In the case of inventory financing, the bank typically purchases the goods that a manufacturer buys from its suppliers. “They go into a warehouse held by the bank,” Camerinelli explains. “When the company needs product for its manufacturing process, the bank resells the goods to the company. From a balance-sheet perspective, the value of the inventory is not sitting on the books of the buyer but on the bank’s.”
With distribution-side financing—an infrequent arrangement, according to Camerinelli—the manufacturer is essentially put in the position of a supplier with respect to the next link in the supply chain, which could be wholesalers or retailers, for example. “The objective is to cash in as early as possible,” says Camerinelli. In this case, it is the supplier that anchors the deal, enabling favorable financing terms to its customers.
PrimeRevenue, a 13-year-old company headquartered in Atlanta, has attracted 60 bank and non-bank funders to a cloud-based technology ecosystem that automates supply-chain financing.
“The system works to free up cash for large companies that have large and complex global supply chains,” says Tom Roberts, the company’s senior vice president for Marketing, “and also works on providing cash flow improvements for their suppliers.” The company processes $100 billion in transactions for 20,000 customers on an annual basis and recently introduced a program targeted at mid-sized companies.
There is generally a primary funder and a back-up funder for each anchor company, but “this does not involve an auction process,” Roberts notes.
The beauty of supply-side financing is that smaller and weaker suppliers are able to play off the more robust finances of their larger customers. “The cost of capital of the larger and stronger company will be lower than a company with a weaker financial profile,” says Rob Stigall, sales manager for Global Trade and Supply Chain Finance at Bank of America Merrill Lynch. “This creates a great deal of value for the suppliers because they can access an interest rate tied to the stronger financial profile of the buyer and get paid earlier. This type of financing generally does not appear on their balance sheets as debt. The buyers’ payment terms also improve and the overall effect is to strengthen the supply chain and make that entity much stronger in the global arena.”
In the case of NIS, the interest rate it pays on its Whirlpool invoices is a full percentage point lower than if it arranged financing through its own bank, reports Burge.
Funders are attracted to PrimeRevenue’s platform for several reasons, according to Roberts. “Since the financial crisis, bank decisions have been driven by regulatory change and risk profile,” he explains. “The banks have restricted funding in certain geographies and asset classes and have pulled out of some markets altogether. Trade receivables represent an attractive asset class and the returns on these short-term loans are very good.”
In addition, Roberts adds, it would be expensive for a bank to replicate the kind of technology that PrimeRevenue offers. “They would be hard-pressed to stay ahead of where the market is going from a technology perspective,” he says.
For NIS, participating in the Whirlpool-sponsored PrimeRevenue program has provided multiple benefits. “It has alleviated bank reporting and auditing requirements and the expenses that go with it,” says Burge. “We haven’t been through a bank audit in years. At one point, we were spending close to $60,000 on bank audits alone.”
The staff time it took for auditing and reporting represented a quarter of a full-time employee over a year’s time. Without considering the favorable interest rate the company obtained thanks to Whirlpool, NIS gains a financial benefit of around $100,000 a year through its participation in the PrimeRevenue program.
NIS’s interest-rate benefit is even more dramatic. That, says Burge, comes out to “somewhere near a quarter of a million dollars a year in interest.”
