In a blog post last Friday, Jason Busch brought up an interesting twist on the credit crisis…namely the ability of businesses to pass along increased supply chain costs to the end customer in an environment of tightening belts and lowered spending. He cites a story out of the UK where Marks & Spencer and other retail clothiers are planning to increase their prices to recoup some of their supply chain costs that have been on the rise (transportation, overseas wages, commodities, etc.). Raising prices is a risky tactic indeed in down economic times when purchasing entities (from consumers to businesses) are tightening the belt, looking for deals, and only spending on what they really must while they ride out the crisis.

But what options do businesses have if they are going to protect their margins and maintain their business models if their underlying costs are going up? Can buyers affect the cost structure of their suppliers and so prevent the cost increases they are hoping to pass along? I’ll leave the answer to that in areas of transportation and material costs to commodity experts in those fields, but one area of cost going up for many suppliers in the credit crunch that I can speak to, and that buyers can indeed influence, is the cost of financing.

In my past few posts, I have focused on the supply chain risk that suppliers’ lack of access to credit poses to Buyers. But another effect of the credit crisis that is becoming evident is that for those who can get credit, the cost of that credit is rising. As David Smick puts it here, there are two basic sides to the credit crisis coin: “The cost of money is rising and the availability shrinking”. This is especially true if suppliers have to resort to expensive alternatives for cash flow such as pcards and traditional factoring.

At least in the area of increased costs of cash to small and medium sized suppliers, large buyers in particular can indeed take steps to lower the credit costs in their supply chain. This is where 3rd party receivables financing fits in so well.

By it’s very nature, 3rd party receivables financing - offered through companies such as Orbian or financial institutions - allows suppliers to sell their receivables at extremely low cost by leveraging the historically low cost of capital of their investment grade buyers. In this type of 3rd party financing, the rate that suppliers pay to access the cash locked up in receivables is significantly lower than their alternatives in normal circumstances, with the cost delta being even greater in these extraordinary times.

For example, a supplier able to access a line of credit for short term cash flow may pay 10%-12% APR or more if they are fortunate. And suppliers accepting Pcard or doing traditional factoring will pay 24%+ for that cash. By way of contrast, a 3rd party financing program leveraging a large buyer’s cost of capital can offer early payment to a supplier at a discount rate equivalent to as little as 5% APR.

That lowers costs to suppliers and effectively removes the need to pass those costs along. There are lots of cost pressures on businesses right now, but at least in the area of cash-flow & credit costs, by utilizing 3rd party financing buyers have a solid tool to lower costs in their supply chains. And I’d say lowering costs beats raising prices…especially when it gives you a competitive advantage in challenging economic times.

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.