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In response to higher interest rates, several major companies have reportedly made the decision to reduce the size of their supply-chain finance programs.
This financing option, which allows companies to extend payment terms with vendors, gained popularity as it enables buyers to retain cash for longer periods while allowing companies to avoid debt on their balance sheets, the Wall Street Journal (WSJ) reported Wednesday (July 3).
AT&T, for instance, has been paying down its program as interest rates have climbed since the Federal Reserve initiated rate hikes two years ago. The telecom giant views this strategic move as a prudent decision to minimize financing costs, according to the report.
Similarly, Keurig Dr Pepper is currently renegotiating terms with vendors to counteract the impact of higher interest rates, the report said.
During the pandemic, supply-chain financing played a crucial role in helping companies maintain liquidity amid disruptions in manufacturing and logistics, per the report. These programs typically involve a third party, such as a bank, paying vendors before the scheduled due date, with the buyer reimbursing the bank at a later date. However, as interest rates have risen, vendors have seen larger discounts on their payments.
Despite the cutbacks by some large corporations, many companies still find supply-chain finance programs advantageous in a high-rate environment, according to the report. These programs offer buyers a means to bolster cash reserves without resorting to debt or loans, while vendors benefit from receiving payments more promptly.
Nonetheless, supply-chain financing has faced scrutiny due to its involvement in the collapse of investment firm Greensill Capital in 2021, the report said. Concerns have been raised regarding the potential volatility it introduces to a company’s cash flow and the associated liquidity risks.
In response to these concerns, the Financial Accounting Standards Board implemented rules mandating companies to disclose information about their supply-chain finance programs, including their size, per the report.
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