Like most of you, I spent the last week glued to my financial TV news outlets, rss feeds, Wall Street Journal and (because I was traveling) the USA Today Money section, trying to make some sense of the turmoil rocking the banking sector. When giant, old institutions like Lehman Bros. and AIG fail, and others like Goldman Sachs, WAMU and others stand on the brink, the effects are felt in every corner and have implications both immediate and far-reaching. Statements like this from Bloomberg about the state of the credit markets certainly didn’t inspire confidence:

“Credit markets seized up as the collapse of Lehman Brothers Holdings Inc. and downgrades of American International Group Inc. drove the cost of borrowing in dollars overnight to the highest level since 2001.”

And while I am certainly concerned about the impact of the past week on my own personal financial future, from a professional standpoint the impact is much more immediate and severe upon a supplier community that depends on short-term credit to fund their operations and stay afloat.

With financial institutions going into survival mode (if they are survivors, that is), available credit is rapidly disappearing. For example in retail, USA Today summed up the predicament…

“Retailers typically fund their business with short-term lines of credit and long-term loans….[and] a credit crisis is the last thing retailers need….now more than ever, the survivors at retail are going to be the ones who either have cash or have access to it.”

This leaves many suppliers - even those with excellent credit - finding it difficult, if not impossible, to access the cash flow they depend on. Some are even having their established credit lines yanked out from under them!

This means that with the exception of any liquid assets suppliers may have, converting receivables into cash is a supplier’s only cash flow alternative right now. As a result, more and more suppliers are forced to turn to alternative, and sometimes expensive sources of receivables financing such as factoring. In fact, factoring grew almost 7% in 2007 despite the overall constriction of the credit market (shout out to my friends at The Receivables Exchange for that market statistic).

While this impacts your suppliers most directly, make no mistake, the restricted cash flow has added supply chain disruption risk to your business already, not to mention the higher prices that will quickly float to the surface as suppliers resort to expensive alternatives for cash.

So what can you do to moderate the risk to your business and stabilize your supply chain in the midst of such turbulent times?:

1. Be the bank and invest in your supply chain! Now is not the time for Buyers with adequate cash reserves to stand idly by. Through dynamic discounting technology you can take the place a bank otherwise would by providing your suppliers with cash through early payment on their invoices. And in the process, like a bank you can benefit by receiving a discount in return for that accelerated payment.
2. Open up your supply chain to 3rd party financing arrangements that utilize your strong credit and low cost of capital to fund early payment to your suppliers at rates that can actually reduce the overall cost in your supply chain. With short term rates rising at a record pace (LIBOR, a short term interest rate proxy, doubled in the past week from ~3% to over 6%!), the cost to your suppliers lucky enough to still secure short-term credit is rising as well. By utilizing your strength as a buyer in a 3rd party supplier financing arrangement, you can give your suppliers access to cash flow they desperately need at rates far below the market…savings which can be passed on to you as you lower financing costs for your supplier.
3. Utilize supplier network technology to give your suppliers the ability to accelerate their cash flow automatically when they need it. If you have not yet invested in an eInvoicing and Network platform, now is the time to get into the game. An eInvoicing network enables you to connect to your suppliers, rapidly approve their invoices and give them an automatic portal in which to accelerate their payment immediately when they need it to support their business, all while you benefit by removing risks, reducing costs and raising the level of discounts captured.

Clearly every business has a lot to be concerned about as the credit markets freeze and this economic blizzard continues. But as you look to your own liquidity and cash flow health, don’t forget about your suppliers. Because as credit freezes up with banks shutting the door to short-term financing, many suppliers are being left out in the cold to fend for themselves.

Unfortunately, this problem is not going away anytime soon. So I’ll have more on supplier’s alternatives to financing their receivables and the impact that has on your supply chain….. Stay tuned.

Drew Hofler is the Senior Manager responsible for Ariba’s Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH Accredited and held Series 7 & 63 NASD certifications.

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