Explaining Supply Chain Finance and Greensill’s Woes

The concept that it often makes good business sense to delay paying suppliers, keeping cash free for other purposes, has been taken to new levels of complexity. A global industry has grown up of financial go-betweens who buy unpaid invoices at a discount. The firms give vendors cash sooner than if they’d waited for customers to pay -- if they’re willing to accept less than what they’re owed. Supply chain financing, as it’s known, is heralded by its champions as a “win-win” for all sides, but critics point to its opacity and concerns that big companies will use it to mask indebtedness. The struggles at Greensill, one of the new generation of supply chain financiers, are putting the practice under the spotlight again.

In theory, it speeds up payments owed by businesses to their often cash-strapped suppliers. Third parties, traditionally banks and now also independent intermediaries backed by investors, pay suppliers the value of their outstanding invoices minus a discount. Proponents say the arrangement leaves all sides happy: Buyers get their goods weeks, or even months, before having to pay for them, while sellers get paid more quickly -- something many small companies aren’t used to. The intermediary closes the loop by collecting the full invoice amount from the buyer at a later date and profits from the spread.