In response to rising interest rates, several large companies have reportedly decided to scale back their supply chain finance programs.
The financing option, which allows companies to extend payment terms with vendors, has become popular because it allows buyers to hold onto cash for longer and companies to avoid debt on their balance sheets, The Wall Street Journal reported on Wednesday.
AT&T, for example, has been paying down its loan programs as interest rates have risen since the Federal Reserve began raising rates two years ago, a strategic move the telecom giant sees as a prudent decision to minimize its financing costs, the report said.
Similarly, Keurig Dr Pepper Co. is reportedly currently renegotiating terms with its vendors to combat the impact of rising interest rates.
During the pandemic, supply chain financing played a key role in helping companies maintain liquidity amid disruptions to manufacturing and logistics, according to the report. Under these programs, a third party, such as a bank, typically pays a vendor ahead of scheduled payment dates, and the buyer reimburses the bank at a later date. But as interest rates have risen, vendors have been able to take larger discounts on payments.
Despite cuts by some large companies, many still see supply chain financing programs as advantageous in a high-interest rate environment, as they offer buyers a way to build up their cash reserves without relying on debt or loans, and sellers the benefit of receiving payments more quickly, according to the report.
Still, the report said supply chain finance has faced increased scrutiny due to its role in the collapse of investment firm Greensill Capital in 2021. Concerns have been raised about the potential volatility that supply chain finance can cause to companies' cash flows and the associated liquidity risks.
In response to these concerns, the Financial Accounting Standards Board implemented rules requiring companies to disclose information about their supply chain finance programs, including their size, according to the report.
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