7 min read
Key takeaways
- Every supply chain decision is also a cash flow decision. A shorter cash conversion cycle means more working capital—without additional debt.
- Receivables finance accelerates cash inflows without shortening your customers’ payment terms. It provides predictable cash flow—and can help you win deals.
- Supply chain finance is no longer just for large enterprises. It can help businesses unlock growth by enabling you to hold on to cash for longer, avoiding the need for a traditional line of credit.
Supply chain management directly impacts one of the biggest challenges facing midsize businesses: managing cash flow and maintaining healthy liquidity.
Supply chain management is the coordination of all processes involved in sourcing, producing and delivering goods and services. For middle market businesses, that also includes processes critical to strong cash flow: managing payment terms, establishing effective governance and identifying low-cost liquidity solutions.
Marcus Wunderlich, senior technical sales specialist in Trade & Working Capital Solutions at J.P. Morgan, explains how supply chain management affects cash flow and shares strategies for strengthening liquidity while maintaining strong supply chain relationships.
How supply chain management affects your cash conversion cycle
The cash conversion cycle is the time between paying your suppliers and collecting payment from your customers. It measures how efficiently your business turns investments in inventory, labor and production into revenue. Lengthy cycles are particularly challenging for businesses with sporadic large purchase orders or rapid growth requiring significant upfront investment.
When you shorten the cash conversion cycle by extending days payable outstanding (DPO) and reducing days sales outstanding (DSO), you improve working capital. Strong credit management processes help your business collect receivables efficiently, while negotiating favorable payment terms can tighten both the payables and receivables portions of the cycle.
But your buyers and suppliers also want to hold their cash as long as possible. Trade and working capital financing help you keep cash on your balance sheet without affecting your partners’ cash flow.
“These solutions are typically non-debt financing. They don’t increase leverage and have less impact on your financial profile than a revolver or term loan,” Wunderlich said.
Receivables financing and supply chain finance: Solutions for stronger cash flow
Midsize businesses often explore two types of trade and working capital finance, each targeting a distinct stage of the cash conversion cycle.
| Receivables financing | Supply chain finance | |
|---|---|---|
| What it targets | Accounts receivable (collections) | Accounts payable (supplier payments) |
| How it works | You sell outstanding invoices to your bank and receive cash immediately. When your customer pays, you repay your bank. | Your bank pays your suppliers early on your behalf while you may be able to hold on to cash longer. You repay your bank when the invoice is due. |
| Impact on your balance sheet | Non-debt financing doesn't increase leverage and is often cheaper than a revolving line of credit when selling to investment-grade companies. | Non-debt financing doesn't increase leverage and can be cost-competitive with a traditional term loan or working capital line of credit. |
| Time to impact | Faster—once set up, cash flow improves as soon as you sell invoices. | Slower—between setup and supplier ramp-up, expect six months or more before cash flow impact. |
| Best for | Companies with strong invoicing and collection processes selling to creditworthy customers | Companies with strong governance and a supplier base that could benefit from accelerated payments |
| Key benefit | Faster, more predictable cash flow—and the ability to offer extended payment terms that win deals | Extended payables without straining supplier relationships—and the ability to finance sizeable supplier contracts. |
| Complexity | Low. Less operational setup required. | Moderate. Requires procurement team engagement, supplier onboarding and potentially ERP integration. |
Receivables financing
Receivables financing is a form of non-debt financing that helps you get cash on your balance sheet faster. Instead of waiting for your customer to pay an invoice due in 90 days, you sell the invoice to your bank and receive cash immediately. When your customer pays, you repay your bank.
It’s a modern version of factoring, but without the stigma, because the process doesn’t interfere with the business-customer relationship.
Benefits of receivables financing include:
- Faster, more predictable cash flow: You get paid up front—there’s no uncertainty about when invoices will come in.
- Cost-effective financing that preserves credit: As non-debt financing, receivables financing doesn’t increase leverage. When you sell to investment-grade companies, it’s often cheaper than drawing on a revolving line of credit because the bank is underwriting your customer’s credit—not yours. “That’s the typical requirement of a middle market company: ‘How can I finance my business in the most efficient way?’” Wunderlich said. “That makes receivables financing a preferred means of liquidity, and you still have your revolver for a rainy day.”
- Competitive terms that win deals: When you’re competing for a customer’s business, receivables financing lets you offer extended payment terms without affecting your balance sheet. “It becomes a bit of a sales catalyst,” Wunderlich said.
Keep in mind: “Receivables financing is best for companies with a good grip on collection of invoices,” Wunderlich said.
Banks evaluate your receivables’ performance, which is based on the share of customers that pay on time and in full. To minimize late or diluted payments, establish consistent processes for monitoring outstanding invoices and customer financial health.
Supply chain finance
Supply chain finance is a form of non-debt financing that helps you manage accounts payable by giving your suppliers the option to get paid early—while you hold on to cash for longer. Where receivables financing targets the collections side of working capital, supply chain finance addresses payables.
When you offer a supply chain finance program, you give your suppliers a choice: Wait to be paid according to the invoice payment terms or get paid right away. If a supplier chooses immediate payment, your bank pays them, and you repay your bank when the invoice is due.
Historically, manual processes meant supply chain finance was a tool for large companies with more staff and resources. Banks have since introduced digitized, automated workflows that make supply chain finance feasible for companies with $100 million in annual revenue or more.
Benefits of supply chain finance include:
- Extend payables without straining supplier relationships: Supply chain finance keeps cash on your balance sheet while letting suppliers get paid when they need it.
- Protect your balance sheet: Supply chain finance is non-debt financing. It doesn’t increase your leverage and can be cost-competitive with a traditional term loan or working capital line of credit.
- Scale to support multibillion-dollar orders: Supply chain finance fuels growth by letting you say yes to purchase orders too large to finance through a traditional line of credit. Consider a tech distributor with the opportunity to supply several planned data centers—but only if the distributor agrees to keep equipment on its balance sheet to ensure availability when needed. If the equipment costs too much to finance through existing lines of credit, supply chain finance can provide a solution. “It’s just-in-case financing,” Wunderlich said. “If a buyer comes along with a purchase order that exceeds what your balance sheet or revolver can support, supply chain finance can help you finance orders you might otherwise have to decline.”
Keep in mind: Setting up a supply chain finance program requires more effort than setting up receivables financing. Between initial setup and ramp-up, as suppliers opt into the program, a supply chain finance program may take six months or more to affect cash flow.
“The heavy lifting is typically with the procurement teams who need to negotiate payment terms with suppliers,” Wunderlich said.
When choosing a supply chain finance approach, consider cost, efficiency and your team’s technical resources. Options range from highly automated systems that connect directly to your enterprise resource planning (ERP) system to streamlined solutions that require less IT integration but more manual work.
“The question, particularly for a smaller client, is do they want the Rolls-Royce? We have simplified, more economical solutions, and as they get bigger, we can offer more sophisticated solutions,” Wunderlich said.
How to use receivables financing and supply chain finance effectively
You’ll get more from receivables financing and supply chain finance when you:
- Establish strong governance: Both solutions are more effective when you’ve already tackled foundational supply chain management practices, such as building consistent collection and invoicing processes and regularly monitoring working capital metrics. Supply chain finance also requires engaged leadership and working capital discipline. “When a supply chain finance implementation doesn’t succeed, it’s often because there’s no mandate from the top of the house,” Wunderlich said. “Companies with clear working capital goals at the C-suite level, and maybe even a working capital committee that measures progress against key performance indicators, are more successful in achieving their goals.”
- Start early: The best time to talk to your banker about working capital financing is before you need it. Supply chain finance, in particular, isn’t an overnight solution. “Let’s get the frameworks in place—the accounting treatment, IT integration, legal work—so that when you see that big purchase order, you’ve already explored your options and agreed on the path of least resistance,” Wunderlich said.
- Match the solution to your stage of growth: Options range from streamlined, lower-integration approaches to fully automated systems that connect to your ERP. Start with what fits your current resources and scale up as you grow.
- Track progress against clear metrics: Monitor your cash conversion cycle, DSO and DPO regularly. Companies that establish working capital KPIs at the C-suite level see stronger results from these programs.
We’re here to help
Trade finance solutions help you prepare for sustainable growth by protecting your cash flow and strengthening supply chain relationships. Whether you’re competing for new customers, laying the groundwork for growth or simply looking to strengthen your financial foundation, J.P. Morgan bankers and industry specialists can help you get there.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
