Mars halves their supplier’s cost of finance: the truth about Mars’ terms extension

Mars have recently extended payment terms from 90 – 120 days and in doing so have done their suppliers a big favour. Why? SCF is why! While undertaking their terms extension project, Mars have wisely implemented a supply chain finance (SCF) program which they are offering to suppliers to sweeten the bitter pill that is, longer terms. SCF acts as a buffer by allowing suppliers to get paid early, in some instances as early as 12 days after invoice date. That’s 108 days before Mars is due to make payment.

The beauty of an SCF program is that the financier takes Mars risk and therefore the program is priced accordingly. It’s true the suppliers cover the cost of the program through a discount to the invoice but this works out to be much cheaper than what they would be paying to cover the payment terms should they use their own funding. In many cases, it’s cheaper for suppliers to take the extended 120 day terms and use the SCF program, than to stay on 90 days and cover the payment terms using their own balance sheet.

Let’s assume the following example:

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If it’s so good, why doesn’t everyone use SCF?

In Europe, they do! One of the reasons why SCF is relatively unknown in Australia is because it’s “imported knowledge”. Local subsidiaries of global MNCs have been given working capital efficiency targets by their offshore parent companies and in turn been advised to look at these types of financing arrangements to help them get there. In the past, there hasn’t been this need to look at alternative sources of funding given economic good times and the seemingly never-ending abundance of cheap debt. This has changed in recent years and as a result the interest in SCF by local companies has increased.

Another reason why SCF has taken longer to reach critical mass here is because these programs aren’t as easy to implement as debt. They require a project team on both the SCF provider’s side and the Corporate’s side. This team comprises a number of functions including Treasury, Procurement, Technology, Legal and Audit. That’s just to get the buyer up and running! Then there is the supplier roll out, education and on-boarding in line with the negotiation of longer payment terms.

It is typically the supplier education and on-boarding piece where the most pain is felt with these programs and the reason why these programs take time to scale. There is a lack of understanding by suppliers and this is not helped by poor explanation on the part of banks and 3rd party providers of this product. They struggle to overcome the Australian psyche of “if it appears too good to be true, it usually is”. In addition, when it comes to supplier on-boarding, banks processes are manual and paper based, requiring loads of human effort. There comes a point at which it becomes economically unviable for banks to on-board certain, smaller, suppliers.

Times are changing though. Home grown fintech companies have seen the opportunity to solve for the buyer side through agile technology and the ability to easily customise buyer integration requirements. They have also seen the opportunity to speed and streamline the supplier on-boarding process through the use of technology, hence lowing the cost to serve model of these programs. They have also actively sought SCF experts with knowledge of local application of the product to ensure supplier education is clear and consistent.

When these programs are implemented well, the feedback from the suppliers is glowing. Words to the effect of “this program has transformed my business, thank you!”. One of the reasons why both the US and UK Governments have mandated this form of funding across their biggest companies.

If it’s so hard, why bother?

The benefits are far reaching both for the buyer and their suppliers. If structured correctly, this program is balance sheet efficient for both parties and the buyer retains trade creditor status and the supplier also records no debt, rather turning receivables into cash. This has implications on covenants for both. It also means buyers can extend terms and manage working capital, making their businesses more robust and more able to withstand economic volatility. For suppliers, cost isn’t the only angle, there are other benefits for suppliers with this form of funding, such as the ability to reduce their overdraft/debt on balance sheet (effecting bank covenants) or restructure that debt to allow for growth and expansion. Also, SCF is unsecured funding for the supplier, without the need to go through a bank credit process. It’s totally up to suppliers when, or even if, they want to get paid early. Some may choose to wait 30, 60, 90 days or even to maturity at 120 days to be paid. SCF is flexible, with no obligation to participate and an “opt in opt out” approach to early payment of invoices.

Therefore, rather than putting a drag on the overall Australian economy as some commentators suggest, payment terms expansion combined with an SCF program actually do the opposite. In effect, SCF acts to de-risk the supply chain by allowing suppliers access to cheap liquidity – something they wouldn’t get if they were required to borrow directly from their bank. Suppliers can use this liquidity for expansion, winning new contracts and ultimately jobs growth, creating a prosperous economy.

The alternative?

The reality of today’s economic environment means that companies, big and small, have a strong focus on working capital efficiency and tight balance sheet management. This is to satisfy the shareholders (of which some of you are, I’m sure). This ultimately translates into buyers extending terms and suppliers shortening them, historically it has just come down to the balance of power between the two as to who wins the fight. Hence, Mars could have just extended terms to 120 days without sparing a thought for the supplier. They have not done that because ultimately, I’m sure they understand, that doing so would not be good for business. Instead, they have offered suppliers access to the cheapest form of funding they are ever likely to receive, as well as the option to receive payment early…very early. So while some may view this as the big guy flexing his muscles and the small guy suffering the consequences. The alternative, where Mars is not able to extend terms, would mean savings would need to be found elsewhere. This could be as dire as moving manufacturing operations offshore (a la Ford and co), or procuring raw materials from offshore suppliers. Resulting in the Australian small businesses currently supplying the corporates and to shut down. In today’s economic environment, without SCF, Australia suffers. 

To find out how supply chain finance can work for you and your suppliers contact us today and speak with our supply chain finance experts.

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