Rules governing supply chain payment terms will spur more companies to set up supply chain finance arrangements, recent analysis suggests.
The push is coming from governments, which are getting involved in helping smaller companies stay solvent.
In Europe, for example, the European Union (EU) Directive on Late Payments allows suppliers to charge interest on payments that come in later than 30 to 60 days, depending on the type of companies involved, as a research report from Aite Group, released this week, detailed.
And, in the U.S., an Obama Administration-led effort, SupplierPay, announced in July, asks large companies to commit to paying small suppliers faster, or to helping these companies get access to lower cost capital.
Among the companies that have signed on to the SupplierPay initiative are Apple, Lockheed Martin, AT&T, Nissan and Coca-Cola, the White House announced this summer. And naturally, the potential difference made to smaller companies is huge. As Susan Kelly reported in July, Apple said it spent more than $3 billion in 2013, with over 7,000 U.S. companies.
While supply chain finance is already mainstream at many companies, these government directives are another reason for companies that may still be holding out for the longest payment terms (to the detriment of their suppliers) to take another look at "ethical" supply chain finance arrangements, said Enrico Camerinelli, senior analyst, wholesale banking, at Aite Group.
"Directives issued by policy regulators cannot alone change behaviors," he wrote in an email, "but they do have the positive effect of educating companies that a commitment to pay suppliers within contractually agreed terms and to financially support those suppliers that suffer from financial distress must become a business imperative for all."
His interviews with a group of small to midsize European company treasurers show that the majority (55 percent) feel that suppliers' financial stability is "extremely important."
And increasingly, even the largest companies are beginning to understand how interconnected they are to smaller suppliers, and often their financial health is dependent on that of the "little guy," Camerinelli added.
"Large multinationals are finally starting to understand that they cannot reach their working capital objectives by just playing 'tug of war' with their suppliers and extending payment terms," he said. "Supply chains are interconnected ecosystems and poor financial conditions and high cost of capital can hinder the necessary 'fuel' needed by suppliers to run the business profitably."
In essence, Camerinelli added, "large buying multinationals are becoming aware that poor financial performance threatens the continuity of their suppliers, and hence, their own business."