Yesterday, GM and Chrysler reported that they’ll begin administering the $3.5 billion in TARP funds to their Tier 1 suppliers ($2b from GM and $1.5b from Chrysler, while Ford took a pass on the Fed’s $1.5b offer that would have reached the planned $5b). The money will be used to guarantee the suppliers’ receivables and, for those who choose, to accelerate payments. The plan is widely considered to be the lifeline many suppliers needed to overcome the liquidity problems they faced due to the credit crunch and a precipitous drop in demand.

Considering the sums of money being pumped directly to GM and Chrysler while they work with the Treasury to decide their next moves, this relatively small sum for suppliers is an extremely wise use of TARP funds. After all, what good is it to keep the OEMs afloat if their key suppliers fail?

And to briefly respond to those who feel that Detroit “deserves what they get”, I should remind you that most of the other auto companies - from Ford to Toyota - rely on many of the same suppliers. The web is complicate and fragile. So, watching these companies die on the vine when all they need to survive this difficult patch is a guarantee on the money they are owed by some of their customers, would have been cutting off the nose to spite the face. It would have crippled all auto companies with US operations, likely assured a double-dip recession, and prevented many auto suppliers from continuing their successful attempts to diversify their customers base beyond the industry. And then there are the jobs at stake…

Behind all the auto manufacturers and suppliers are people who need jobs and the families that rely on them. Let’s all remember that the Home Mortgage industry meltdown triggered a complete stop in the Bank Lending. That bank lending freeze meant no auto loans for consumers. And no loans led to no car purchases. The auto industry, the manufacturers, their suppliers, the workers who need a job and their families are all suffering because of something that happened in a completely different industry. We need to help the auto industry by getting the liquidity flowing so the supplier chain can be restarted. We need to team up to help and support the government who is taking steps to help. It is absolutely critical NOW!!!

Although this is a huge, decisive step forward for the industry, there are still questions. For example, how far down the supply chain will this reach?

The program is for GM and Chrysler’s Tier 1 suppliers (and only for parts made in the US and shipped after March 19th) with the hope that it will “trickle down” through Tiers 2 and 3. But many of those lower tiered suppliers also face liquidity challenges and will need to look to alternative supply chain finance options. The government backing of the Tier 1’s does help the lower tiered suppliers get the accelerated payments they need at competitive rates, since their receivables for parts shipped to Tier 1’s are now on more solid financial ground.

I’m presenting on a webinar (register here) with The Receivables Exchange on April 23rd, where we’ll go over the options on the table for auto suppliers - from those Tier 1’s in a position to join the TARP to the Tier 3’s looking for answers. I encourage you to attend, but if you have immediate questions about guaranteeing receivables or accelerating payments, please leave them in the comments or email me directly [dhofler @ariba.com].

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.