Regardless of where you sit in metals markets, liquidity and cash flow serve as the lifeblood of the supply chain and the individual company.
Manufacturers, service centers and producers largely play a zero-sum game: optimize working capital at the expense of broader total-cost, innovation and risk-management opportunities that ought to bring all parties closer together.
In a zero-sum game, buying organizations — when engaging directly with suppliers — often deploy forceful if not arbitrary rules around payment terms, delivery terms and even the reduction of inventory levels (another tool in the working capital arsenal). All of these tactics are used in a game called “reducing working capital” but each introduces additional risks as well.
Inventory Finance and the Big Picture
Managing inventory effectively, as part of a broader working capital management and/or balance sheet improvement strategy, matters even more in volatile markets, particularly when doing so without negatively impacting supplier relationships. Fortunately, some new techniques and business practices based on inventory financing tied to broader procurement and supply-chain strategies have started to become more mainstream. Manufacturers, service centers, producers and even trading firms have begun working with banks, trading firms, third-party lenders and other partners/lenders (or a combination) directly.
In short, procurement and supply-chain inventory financing can allow an organization to build on its balance sheet and/or take advantage of additional liquidity if needed. None of these forms of financing or techniques negatively impact suppliers.
Procurement-led inventory financing is a complement to other sources of capital. Even for organizations with a tight revolving credit facility, they can still access unsecured credit and “lock-in” balance sheet improvement opportunities without sacrificing actual physical inventory.
What Can It Do For Me?
Done right, procurement-led inventory finance offers a range of benefits:
- Working capital and balance sheet improvements that align with executive, procurement, treasury and accounts payable strategies
- An ability to keep current credit facilities and tap new ones
- Low risk and predictable capital: another “tool” in the working capital belt with assured outcomes (unlike other options)
- Supply-chain risk reduction
- Improved supplier relationships
- Lower landed cost of goods
- Ability to source globally without impacting working capital
Inventory financing approaches today are changing in part because of increased available capital and a willingness to lend. In addition, new technologies provide increased transparency and connectivity between buyer and supplier systems, reducing risk for all participants.
As our introduction to the topic continues, we’ll explore how inventory finance works as well as some of the new tools and models that can streamline the process. In the meantime, for further reading on the topic, see our network site Trade Financing Matters: