Today’s guest post is from Drew Hofler of Ariba (Working Capital Solutions).
The last couple of weeks have really driven home how important cash flow and access to credit is for suppliers right now. They have also served to illustrate the credit dichotomy between large, cash-rich, investment grade companies and their mid-sized & smaller suppliers in the current economic environment.On the one hand, economic indicators are beginning to show that the economy is stabilizing and that the recession may officially be over (e.g. a recent article in the WSJ reporting that GDP grew by 3.5% in the 3rd quarter). On the other hand, it is clear that short-term credit and cash flow, the life blood of most suppliers, is still severely squeezed.
Over the last two weeks, I have had the opportunity to speak to CFOs, Treasurers and COO’s of many small and medium sized suppliers, as well as representatives of many larger companies. And what they are telling me is that while large companies are having no trouble accessing credit right now, the medium and smaller companies are still finding short-term credit very difficult to come by and it is very expensive, or laden with restrictive covenants, when it is available.
Recent headlines back up this anecdotal evidence and continue to paint a clear picture of the gulf between the haves and have-nots in this economic environment. Large companies that have survived this crisis appear to be well positioned for future growth as they have stockpiled cash at record rates. According to another WSJ article, the largest 500 non-financial firms in the US held about $994 Billion in cash and short term liquidity investments … representing the greatest percentage of cash assets in the past 40 years. According to Carsten Stendevad of Citigroup, “Everyone is hoarding cash“. Well, maybe everyone who is fortunate enough to be able to, and therein lies the problem.
For those companies not in this august group, the picture is a little grimmer. Small and medium sized suppliers in every industry have seen their credit lines cut, their access to cash curtailed over the past year and a half, and the flow has not freed up significantly since then. Add to that last week’s not so surprising news of CIT filing for bankruptcy and suppliers’ options become fewer still. (CIT, who provides over $60 Billion in cash flow to over one million suppliers, is the largest provider of short-term credit and receivables financing to small and medium sized business). Rick Patterson, a partner with private-equity firm Spire Capital, sums it up best: “Everybody is looking for alternatives. Capital is much less fluid in these smaller markets than in the bigger ones. The financial crisis has trimmed the number of potential lenders to small companies by more than half, and that will hurt businesses that rely on a cycle of ‘repaying and re-borrowing’ to stay alive“.
While suppliers are finding it difficult to access short term cash flow through traditional markets, they do have options and there are alternatives that are becoming more and more popular with both Buyers and Suppliers to reduce supply chain risk and inject liquidity into the supply chain.
Supplier options really fall into two categories; collaboration/cooperation with their buyers OR working independently to create liquidity.
The first set of options require a close working relationship between buyers and suppliers and the latter requires a supplier to look at new ways to monetize their greatest assets in this economy, their receivables.
In part II, we will explore these options in detail.
Thanks, Drew!