I deliver, you pay
In most business purchases, you pay the seller upfront, before delivery of the goods or services you need. If you don’t have the cash but have the credit, a finance house will make a clip on the trade by extending you some credit. Sellers (normally) are not specialised in lending money. Separating specialisation of skill, the theory goes, is important for the proper functioning of a trading ecosystem.
Corporates with strong credit ratings often arb credit markets
General Electric (GE) is a perfect example of a corporate which leveraged its triple-A credit rating to lend to lesser rated customers. It could tap the bond markets at a lower yield than banks, lend to its customers at an extremely competitive rate, earn a nice spread in between and boost sales by creating additional demand for their products. Happy days.
The risks of a industrial conglomerate become a huge lender hit home when GE ended up taking a government bailout in the financial crises and ultimately divesting GE Capital, their financing arm. Despite this, it is fair to say that a huge rated conglomerate (like GE) is able to weather the storms of being a lender in a better way than a (relatively) smaller supplier (who in all likelihood has no public debt, credit rating, etc.).
But that is what the big energy infrastructure buyers are asking their suppliers to do
An oil & gas operator purchases equipment from an equipment supplier. Once the equipment is delivered, huzzah, the trade should be complete. But no. After the purchase order comes the invoice. The buyer receives the invoice from the supplier (normally via PDF on email, to be manually inputted by the buyer, but that’s a story for another time) and three months later the cash is disbursed to the supplier.
This is called lending!!!
And the supplier is the lender. Putting pitfalls of taking credit risk to buyers to one side (Carillion!!!), the supplier has to fund operational costs and COGS well ahead of getting hard cash from their buyers.
Just say no!
But the reality is that suppliers will not. Breaking rank with a huge buyers demands has dire consequences for future business, especially when the industry accepts these kind of payment terms as standard.
For anything that does not make sense, there is a solution
Financing providers are stepping in to solve this inefficiency. There is a market for working capital, invoice financing, trade financing, purchase order financing, virtual credit card payments, etc. which oils the cogs of transactions between counter-parties.
DeepStream is in this market
Most suppliers are not aware that these financing solutions are available to them. For any applicable transactions, DeepStream automatically identifies transactions could benefit from different financing solutions and offers, on an optional basis, suppliers access to capital. Having a clean flow of transaction tender/ purchase order or field ticket/ invoice on one medium has huge benefits in terms of getting lenders comfortable in lending to suppliers.
See a recent article in Bloomberg around DeepStream and its vision for easing transactions in the supply chain through deployment of supplier financing.
Written by Jack Macfarlane
The oil & gas supply chain is unwittingly dancing with the fire of finance was originally published in DeepStream on Medium, where people are continuing the conversation by highlighting and responding to this story.