What does it refer to?
Sounds like a great idea. But it may not be very smart.
“Sell it before you pay for it” – receive goods from your suppliers and pay for them later, after you have sold them. The more you buy, the more cash you generate. What’s not to like?
Is this a good way to run a business?
Sourcing goods on the basis that you “sell it before you pay for it” is unlikely to be the best way to run your business. Putting the whole task of financing your supply chain entirely onto your suppliers is unlikely to be the best answer.
What is the problem?
There is no “free lunch”.
- There is a working capital gap in every supply chain.
- This gap will vary from industry to industry, and from one trade to another – a typical working capital gap might be 180 – 240 days.
- Working capital is needed from the day that materials are purchased to start manufacturing to the day (after delivery and distribution) when goods are sold and turned into cash.
Someone has to fund the working capital gap and someone has to pay for the cost of the money that is involved.
It is the buyer who pays these costs. Suppliers always include financing costs when they agree the price of their goods with the buyer. Many suppliers have weaker access to financing than their buyers.
So “sell it before you pay for it” may not be a smart plan?
It is probably only smart when the cost of finance in the supply chain is lower than the cost of finance for the buyer himself, taking all the relevant factors into account.
This is rarely the case. The supplier may be located in an emerging market with no access to collateral-free finance, and may also face foreign exchange controls with obligations to local banks that can be hard to manage.
But is the answer then for buyers always to pay upfront? Also the answer is likely no.
What is the answer?
It is rarely correct to put all the burden of finance entirely onto the buyer side or entirely onto the supplier side.
There are many factors to consider when determining the optimum strategy, including:
- What are the average payment terms in the buyer’s industry?
- How quickly does the inventory turn in the buyer’s books?
- Does the buyer have free banking lines available?
- Does the supplier have free banking lines available?
- Who can borrow more cheaply – the buyer or the suppliers?
- Do suppliers need payment before shipment to clear local foreign exchange regulations or meet obligations to local banks?
- And there are others, case-by-case …
Buyers who put too much financial strain on their supply chain can push suppliers into expensive and unofficial funding sources, or even into financial difficulty – and this can cause delay and interruptions in the supply of goods. But buyers who pay upfront or provide LCs may be unnecessarily using their financial resources when smarter solutions can be used.
Most buyers take the time to analyse the various factors involved and devise an optimum financing strategy for the supply chain. This can be mean early payments for some suppliers in some locations and credit terms being required from other suppliers.
PrimaDollar can assist
Working with a buyer, we use a logical approach to consider the various factors – and the answers can be simple and clear. The optimum strategy can vary from supplier to supplier, and from one season to another during the year.
Buyers use our export finance solutions to smooth out the differences between one supplier and another, and between one geography and another. If your suppliers need pre-shipment LCs in one country, but your suppliers in another can work on DA terms (sale contract, deferred payment) in another – we smooth all this out for you.
We provide export finance which is flexible, customisable and without commitment fees. It is low cost and collateral free. Individual suppliers can receive the optimum financial support whilst the buyer can operate a standardised payables process on all suppliers across all geographies, and all year round. This smooths out financial results for the buyer and keeps back office processes simple.
We take care of the working capital gaps.
How can I find out more?
With a global network and global coverage, talk to us.