The prospect of economic recovery is bringing innovation andgrowth to programs that help supply chains maintain critical linksby supplying flexible enough liquidity to weather contractions andmeet the increased demand that could come with an expansion.

Such innovation is filling in cracks where assets traditionallyhave been denied financing. UPS Capital is a niche player that sawan opportunity to move into supply chain finance (SCF). Thesubsidiary of Atlanta-based United Parcel Service is leveraging itspossession of goods in transit and information about those goodsinto a program that will advance cash for goods being shipped viaUPS, generally from foreign suppliers to U.S. buyers using oceanfreight. The company has a similar program for inventory held byU.S. companies in foreign countries.

These two areas have generally been ineligible for asset-basedfinancing, explains Mark Robinson, senior managing director for UPSCapital Supply Chain Finance. “If we have possession of the goodsin transit or in foreign warehouses and if we have all theinformation lenders require, we can open the door to liquidity incash-intensive activities where financing has been difficult toget,” Robinson says. In these cases, UPS Capital provides some ofthe funding but most comes from partner banks, he notes.

Once a foreign supplier's goods are packed for transport, thecontainer is turned over to UPS for shipping, and UPS has the billof lading and other shipping documents, the goods may becomeeligible for advances. The lending margins, Robinson says, are“attractive.”

Financing is also starting to appear for transactions prior toinvoice approval. Usually third-party lenders entered the supplychain finance business to offer early payment to suppliers onceinvoices had been approved by the buyer, but now some growth isoccurring in upstream activities such as inventory finance orpre-shipment finance, reports Shawn Taoufiki, source-to-settlepractice leader at REL, a supply chain consulting division of theHackett Group, an Atlanta-based performance benchmarkingcompany.

“There are challenges, particularly for U.S. banks, since theyare legally barred from owning trade inventory on behalf of otherparties, but banks are working with freight forwarders or logisticscompanies to circumvent those barriers,” Taoufiki says. Banks arealso getting more involved in automating purchase order and invoiceprocessing so that they see the data they need to make creditdecisions, he adds.

More in the mainstream, companies like $4 billion Hanesbrands inWinston-Salem, N.C., are capitalizing on their opportunities bothas buyers and as suppliers. In the honeymoon period following its2006 spin-off from Sara Lee, Hanesbrands paid its suppliers in lessthan 30 days. Then the highly leveraged enterprise moved tohard-line 55-day terms. (The CFO must approve quicker payments.)When its mostly Asian suppliers complained, Hanesbrands worked outone-off arrangements with HSBC in which the bank pays approvedinvoices more quickly in return for a discount. Now Hanesbrandstreasurer Rick Moss is working to expand that ad hoc solution into“a standardized, global program.

“When we renegotiated our revolver last December, we did acarve-out of $150 million for a supplier financing program, so welaid the groundwork,” Moss explains. “The challenge for a globalprogram is all the local regulations. You often need a presence inthe suppliers' locale.”

As a supplier to Wal-Mart and Kohl's, Hanesbrands takesadvantage of the retail chains' supplier financing programs to thefullest, Moss says. “Since we have $2 billion in debt, it's ano-brainer for us. The cost of that financing is below our normalcost of funds, so we automatically discount all invoices as soon asthey become eligible.”

But Hanesbrands also has a receivables securitization program,so it doesn't aggressively push more customers to offer financing.“Our securitization program is working well, so we'd need to see acompelling reason to take receivables out of that program to use adirect customer program,” Moss explains.

Revere Industries, a Toledo, Ohio, maker of ejection-moldedplastics, uses a program sponsored by Whirlpool, a major Reverecustomer, to finance Whirlpool receivables, says CFO Jim Crews.

Revere avoids factoring because it's more expensive and canresult in problems with bank lenders regarding collateral title,Crews says. With Whirlpool's SCF program, which he accesses via theWeb site of PrimeRevenue, a multibank supply chain financeprovider, it's a clean transaction. “PrimeRevenue has no recourseto Revere if they have a problem collecting from Whirlpool,” Crewsnotes. Because Whirlpool's credit status held up well during therecession, Revere had no problems getting all the advances itwanted, he adds.

Crews has used different banks in the program but only one at atime. Each bank has its own legal agreements, but the language andthe rates are quite consistent from bank to bank, he reports.

Not every company sees an advantage to involving banks asprofit-making middlemen. “We looked at several proposals from banksbut it turns out that the discounts we get from paying oursuppliers earlier made more sense for both parties since we havethe liquidity anyway,” says Robert Yenko, Intel's assistanttreasurer.

Necessity is still the mother of invention. Supply chain financethrives in chains where suppliers are in dire need of cash andbuyers are eager to extend terms. The incentive to employ supplychain financing is strongest when the suppliers arecapital-intensive businesses with a lot of working capital tied upin raw materials and inventory, says Kurt Albertson, procurementadvisory practice leader at the Hackett Group.

Buyers are rationalizing their supplier base and reducingsuppliers, so supply chains involve fewer players with greaterdependency, reports Bob Kramer, vice president of working capitalsolutions at Atlanta-based PrimeRevenue. Companies generally offerfinancing to suppliers of direct materials, those used tomanufacture products, and enroll suppliers of lower-value goods inpurchasing card programs, which may allow them to be paid quicklyin exchange for a discount with a bank's money.

While supply chain finance programs are growing, penetration isstill low. “The potential is great,” notes John Ahearn, global headof trade financing at Citigroup. Ahearn estimates that only about1% of global B2B transactions are currently covered by supply chainfinance programs.

Since the great credit crunch began in 2008, supply chainfinance programs have gained favor with buyers, sellers and banks,but the trend has been to diversify funding sources. Tight credit,which increased the cost and decreased the availability of credit,further spurred demand for supply chain financing, especially aslarge corporates continued to extend supplier payments, Kramerreports. With cash hoarding rampant, demand for bank financingincreased. Banks, in many cases, lowered their credit limits onindividual buyer companies but continued to find the credit riskand the lending spreads attractive. Financing had to be spreadamong a greater number of banks, but the funding never really driedup, he reports.

The credit crunch brought a spike in the demand for SCF amongcorporate buyers and sellers and a contraction in lending by banks,reports Mike McDonough, executive director of the global tradefinance group at J.P. Morgan. “Demand went through the roof,”McDonough says. “Supply was provided on a case-by-case basis.”

Some lenders cut back their exposure to struggling names likeGeneral Motors and Chrysler, which had large SCF programs. Otherbanks saw it as an opportunity. There are no reliable statisticsabout total program outstandings, but McDonough's hunch is thattotal program volume “expanded substantially in the past twoyears.”

At the same time, the alternative of asset securitization fadedfor many would-be issuers. The mortgage-backed securities debacleunfairly tainted all asset-backed securitizations, hurting theability of suppliers to securitize their receivables, Citi's Ahearnnotes. On top of that, tighter restrictions on the holdings of2(a)7 money funds have dampened the funds' appetite forreceivables-backed paper, and FASB 166 and 167 changes have made itharder to get off-balance-sheet treatment for receivablesfinancing, he explains.

As bank-funded programs get larger while banks remain cautiousabout credit risk, one-bank programs are becoming multibankprograms, with structures that look a lot like lending syndicates,McDonough reports. “A $500 million program may be too large for onebank's balance sheet,” he says. “To bring the needed liquidity,other banks are being brought in.”

Players like Orbian and PrimeRevenue already had multibankplatforms, which initially took market share from the proprietarybank platforms. But now banks are providing their own multibanksolutions to compete, McDonough reports.

In programs like PrimeRevenue's, the supplier can sometimes picka bank or banks with which to arrange discounted payments, butthere's nothing like an auction to help find the best rate. Infact, rates tend to vary little, Kramer reports. However, Ahearnnotes that some buyers have created quasi-auction facilities wheresuppliers can shop for the best deal among several banks in aprogram.

The buyer-sponsored programs provide guaranteed funding forapproved invoices to suppliers eligible for the program, Ahearnexplains. There are also plenty of receivables financing programsthat aren't buyer-sponsored and aren't guaranteed. The factor,lender or investor picks which receivables they will fund. On TheReceivables Exchange, for example, a company can put a group ofreceivables up for auction at a Web site. Investors bid to buythem, which means the seller gets top price, but there is noguarantee that a receivable will sell. “You could put 100receivables up for bid, but only 50 of them might see action,”Ahearn notes.