Today the US Treasury announced that they’ll use up to $5 billion in TARP funds to guarantee auto suppliers’ receivables, thus unlocking the liquidity needed to keep the supply chain flowing to GM and Chrysler…AND by extension, the other OEMs since they all share the same web of suppliers. The long awaited move (well, “long awaited” if you’re a supplier or OEM on the brink of financial collapse or supply chain interruptions), will “provide suppliers with access to government-backed protection that money owed to them for the products they ship will be paid no matter what happens to the recipient car company”, according to the Treasury.

First of all, it’s great to see the government taking action on this issue, which was widely seen as a time bomb for the entire industry. And the fact that so much can be accomplished (saving an industry from collapse) for what in relative TARP terms is a modest amount of money (all of which will never leave Treasury coffers unless GM & Chrysler default), makes this a move that “could change the story line” according to Mike Wall, an analyst with CSM Worldwide Inc.

The main points in Treasury’s brief announcement:

• Suppliers will pay a 2% fee for government insurance for any receivables they want guaranteed (Detroit Free Press).
• Suppliers also have an early payment option - for an additional 1% fee - to sell receivables to the government and get immediate payment.
• GM & Chrysler will have “skin in the game” to the tune of 5% or $250 million each (Forbes).

Obviously, everyone is very busy pouring over the details. And there are many unanswered questions at this point, such as:

• How far down the supply chain will the program reach (Tier 1 only)?
• Will selling the receivables for 1% in the government program provide the best option?
• Or, will selling those receivables on an open exchange be more attractive?
• Is $5 billion enough?
• And how does this program mesh with current and future aid to GM and Chrysler?

We’re co-sponsoring a webinar with The Receivables Exchange next week (register here) discussing new ways for any supplier (not just auto suppliers) to convert their receivables into cash. As part of that webinar, we will also discuss the details of this program and the various options on the table for auto and non-auto suppliers alike to accelerate their cash flow in this environment.

Today’s announcement is a potential game changer for the auto industry. So while everyone is excited to act quickly, it’s important to get the strategy right since “bailout fatigue” and continued soft consumer demand make every dollar of bottom line savings that much more important.

Register for the webinar here.

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.