Since the onset of the COVID-19 pandemic in 2020, companies and their vendors have needed creative solutions to keep supply chains moving. One solution that has become increasingly popular involves third-party financing for companies’ purchases. Federal regulators are taking more interest in the arrangements, too, and the heightened scrutiny will impact corporate disclosure practices.
Under supply-chain financing plans, companies arrange with banks or other third parties to pay invoices from their suppliers in a short window of time. The financiers pay the invoices, keeping a portion of the amount owed for themselves, and the companies receive an extension to pay back the financiers at the full rate. Therefore:
- Cash-strapped vendors receive payments more quickly, albeit at a cost.
- Buyers lengthen their payment schedules.
- Financing institutions receive cuts from the payments.
Supply-chain financing has proved especially useful during the pandemic as vendors struggled to keep their lights on in the face of late payments from buyers. Meanwhile, companies are stocking their inventories lately, which is simultaneously straining their working capital. The financing arrangements can serve as a useful bridge between when suppliers fill orders and an extended period for buyers to settle up. One estimate from data provider BCR Publishing Ltd. put the size of the global market for supply-chain financing at $1.8 trillion in 2021, an increase of nearly 40% from the prior year.
Last month, the Financial Accounting Standards Board approved a new rule requiring U.S. companies to provide information about how they finance their supply chains. That includes supply-chain financing programs, which previously went unreported on issuers’ financial statements. Now, companies must disclose their quarterly balances for the programs and make year-over-year comparisons. Companies also must reveal the key terms of their supply-chain financing deals.
Supply-chain financing works well for companies with ample capital. In cases where buyers are experiencing a capital crunch, however, the strategy can produce reporting results that distort the full picture of companies’ financial positions. For example, supply-chain financing can make it appear as though a company has improved its cash flows to an unsustainable degree.
In that sense, the FASB’s change doesn’t seem to be generating significant pushback. It’s hard to come up with serious objections to the idea that investors should know if companies are leveraging up their capital structures via supply-chain financing.
On a broader scale, perhaps companies are growing accustomed to investors wanting to know more about the links in their supply chains. Shareholders are making noise during proxy votes, for example, about holding companies to account for their suppliers’ environmental and social footprints. In that regard, issuers may find investors will reward them for proactive transparency when it comes to sharing more supply chain information.