Two customers in the last month approached us to sign up for a financing program where we provide another 60 days dating (going say from net 30 to net 90) with the ability to be paid on our invoice anytime through their financing company ( eg. Deutsch bank) with an invoice payment discount factored at libor plus a margin. (say 250 basis points). I figure this works back to about 1% net 10 to me so benefit of having remittance control over my receivable seems to be a good deal for minimal cost. I have concern about the cost growing as libor move upwards and I may be faced with significantly higher cost but that is about the only negative I am seeing as the seller. Anyone with experience or comments on this suddenly hot program please weigh in.
Supplier Financing Programs
Answers
We have also had customers do this with us. This helped us guarantee when we would be paid and had no issues with it. We also reviewed this for revenue recognition and found that nothing changed.
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Patrick, did you contrinue to report this as a trade receivable and did you footnote the sale of the receivable in your audit report?
Very bad idea. I would suggest you revisit their financials as a supplier pre-qualification at the next convenient service level review or contract renewal period. The last thing you want to do is be a banker for the non-bankable.
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Linda--These are profitable billion dollar companies utilizing a major banking institution. They are pushing suppliers to this model. I either participate or walk from the business.
If I was not already accepting credit card payments (where you do pay to get the funds), I return to the supplier and let them know that I can only accept this program with an upcharge on my end (usually .25 above the rate I am quoted). Most of the time they are not interested and the topic does not come up again. At the same time I have to be sure to know that my receivables process is tight enough that I can suspend an account the moment they go over their terms, which is what I was warned would happen if I did not go along. I am concerned with floating rates as they tend to only go up over time.
I'd also suggest looking at your new account process and keeping your sales colleagues informed about any trend in extended credit, so they don't pursue really risky prospects. A sale is not a sale until the $ is in the bank:)