Managing the complex nature of the financial supply chain is one of the most delicate balancing acts in supply chain and transportation management. For example, logistics executives are pressured by Treasury and the C-suite to extend payment terms with their carriers to maximize working capital levels. This is not easy but doing so enables them to grow their working capital levels to fund growth, make capital investments, pay down debt, and much more. Excess working capital can also serve as a strategic buffer; companies of all sizes were reminded in 2020 of the value of excess working capital to help weather unforeseen financial challenges.
What is the financial supply chain? According to KPMG, the term refers to ”the monetary transactions that occur between trading partners that facilitate the purchase, production, and sale of goods and services.” Managing the flow of cash, both up and down the supply chain, has become a larger focus of most companies in recent years, especially as new technologies and solutions have emerged and matured.
Teams that manage a company’s transportation activities are being asked what they can do to help their Treasury group achieve their working capital goals. In other words, they’re being asked how far they can extend out terms with their carriers. The answer is often, “It’s complicated.” From a carrier’s perspective, introducing a terms extension is a tough conversation. They have their own financial worries, and, in this industry, cash can be especially tight. Plus, in a market where capacity is scarce and demand is high, carriers could (and often do) balk at any attempt to extend payment terms and simply move on to the next shipper. This is a realistic risk if shippers do not use great care when extending payment terms with carriers.
The Challenges of Extending Payment Terms
The most obvious challenge of extending terms is that there are two sides, each with their own seemingly disparate goals—the shippers who want more days and the carriers who often can’t afford to provide them. Yet, in reality, this does not have to be an adversarial situation. Shippers and carriers are not competitors and, in fact, are working together toward the same end goal—keeping products moving and ensuring on time and in full deliveries to keep their respective customers satisfied.
What both sides may not be aware of is the opportunities that exist with trade finance solutions. A form of supplier financing, trade finance is a win-win solution that eases the effect of a terms extension—and may very well actually improve the carrier’s financials.
Trade Finance - What It Is and Why It Works
Trade finance is a working capital solution that optimizes cash flow for both buyers and suppliers. Such programs are initiated by the buyer and facilitated by an intermediary such as a bank or fintech. In logistics, they offer shippers a way to support their carrier relationships. With a trade finance program, carriers get paid quickly, far in advance of the actual due date. Meanwhile, the buyer pays the intermediary at 60 days, getting the full working capital benefit. The funding period—the time from when the intermediary makes a payment to when it receives the funds from the buyer—is covered by a small discount taken off the payment. In other words, the carrier pays a small fee, and for the shipper there is no cost.
Trade finance programs are based on the buyer’s credit. Because of this, the discount rate is often lower than the carrier can access elsewhere. In other words, trade finance can reduce the carrier’s cost of capital. If the carrier is holding debt at a higher rate, for example, he is wise to leverage trade finance as a source of funds to pay down the debt. If the carrier needs additional cash flow, this is a low-cost source of funds that can pay everyday bills or fund investment in growth. This arrangement also may help carriers avoid taking on more debt or escape expensive factoring arrangements.
Trade finance is truly a win-win, and a great way for shippers to support their carrier relationships. Shippers often implement trade finance programs in conjunction with supplier terms extensions. But we’ve also seen them implement trade finance well after the fact.
Benefits of Trade Finance for Shippers and Carriers
Inevitably, carriers are going to take a “What’s in it for me?” stance. Well, the short answer is they are going to get paid within days of the invoice being processed. Meanwhile, shippers get the extra days needed to help them maintain their desired level of working capital.
- Improve cash availability to cover expenses or fund growth
- Leverage buyer’s credit for low-cost source of funds
- Avoid using lines of credit; potentially reduce debt ratio
- Improve financial resiliency
- Gain early visibility to problem invoices
- Reduce accounts receivable costs (see below)
- Extend payment terms and maximize working capital contribution
- Reduce financial risk from transportation network
- Strengthen partnership with carriers
A Bonus: Trade Finance Also Simplifies the Carrier’s AR
Carriers appreciate early payment programs in general because of how much easier their accounts receivable processes become. Because all invoices for a particular client are typically paid quickly, the number of outstanding invoices at any given time is small and easy to manage. Additionally, AR staff can gain early visibility to problem invoices. They will know that if an invoice is outstanding after the typical number of days for payment, there is likely a problem that needs investigating. The sooner they can fix it, the sooner they receive payment.
In the world of supplier financing programs such as this, solutions for transportation spend are almost impossible to come by. Read our first post in this series to learn why, and to understand how Cass, as a freight audit & payment provider with a banking subsidiary, is uniquely able to overcome the challenges that others face.
Cass Information Systems: A Trusted Name in Trade Finance
Cass Trade Finance is part of the Cass Financial Suite®, a full set of options for shippers and carriers to maximize working capital. Through our freight audit & payment solution, on top of which trade finance is layered, Cass delivers sustainable savings, a trusted process, and reliable, detailed visibility into all transportation costs. We process and pay more than $44 billion in freight spend annually, with more than 14,000 freight carriers & LSPs in our payment network. Our supplier financing programs are uniquely supported by Cass Commercial Bank. To learn more, contact us today.