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The Nasty Shock When Cash Supplies Are Switched Off

A major pitfall of invoice financing techniques like supply-chain finance: Funding sources can be cut off just when they’re needed most.

By Chris Bryant | August 17, 2020 at 06:16 PM

When the global economy went into hibernation to try to halt the spread of Covid-19, companies everywhere scrambled to get their hands on cash. Banks, shareholders, and governments were all tapped for money, but self-help played a big part too. Businesses tried to clear their inventories, to get paid quickly for their products and services, and to pay their bills more slowly. A company that does all those things should have more funds in the bank to pay wages and other fixed costs—crucial if you want to survive an economic crisis of this scale.

As is so often the case, those creative types in the finance industry have come up with a smorgasbord of ways to help firms increase their cash holdings. The oldest and most common is called factoring. Essentially, if you’re a cash-strapped company whose customers are dragging their feet on paying their bills, no problem: A bank will give you an advance on those invoices, for a fee. Another increasingly fashionable technique is a more complicated service known as reverse factoring or supply-chain finance. This allows a company’s suppliers to quickly get paid what they’re owed. The company then refunds the finance provider at a later date.

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