Averting a Cash Flow Crisis: One Supplier's Story

If you're a small or midsized supplier, Ariba Receivables Financing offers an excellent solution that can help improve your cash flow: the chance to sell your receivables to capital providers in a secure, online auction process through Ariba ecosystem partner The Receivables Exchange. The result? You get the cash you need quickly at highly competitive market rates. And as Chicago-based Smedberg Machine Corporation recently discovered, that can make a huge difference to your business.

As a first-tier supplier of engineered solutions to automobile and metal stampers in the manufacturing sector, Smedberg Machine Corporation provides new equipment and turnkey upgrades–including equipment analysis, design, engineering, manufacturing, service, and aftermarket maintenance–to improve production throughput for its customers worldwide. With an employee base ranging from 35 to 45 people, the company lacks access to the capital resources often available to larger corporations, so late payments from sizable customers can significantly strain cash flow.

Drew Hofler, senior manager of working capital solutions for Ariba, spoke with company president Kenneth L. Smedberg to learn how Ariba Receivables Financing proved critical in helping the company maintain its financial health.

Drew Hofler: What made you decide to try Ariba Receivables Financing?

Ken Smedberg: A situation arose at the end of last year that led us to it. One of our big customers revised its rules about when components needed to arrive at their plant in order to qualify for net 10 payment. Previously the required date was December 18, but they had changed it to December 22 and didn't inform their suppliers about the shift. So I was ready to leave for vacation when I suddenly discovered we weren't going to get paid–which meant we wouldn't have the cash we needed to meet Christmas payroll. Our backs were against the wall until Ariba Receivables Financing came through for us.

Also the rates are a lot better. Ariba Receivables Financing just charges a low daily rate–and only for the days until the receivables are paid by the customer. This is in stark contrast to a factor's terms, which are annualized at around 36 to 42 percent no matter how quickly your receivables are paid.

Hofler: Why hadn't you used Ariba Receivables Financing previously?

Smedberg: We actually weren't very familiar with it. Then when we were scrambling for a solution, my comptroller came in and alerted me to the Ariba financing option; he had read about it on your website. Initially we were cautious, because we didn't understand the cost implications. We thought it was factoring, which is not a financing arrangement we were willing to do because of the expense and the strictures it can place on your business. But when we looked into this, we realized it was a lot different than factoring.

Also, when we first heard about The Receivables Exchange, we thought, "Is this someone with a green visor sitting in a basement in New Jersey?" Because we didn't yet know about it, we wondered if we could trust them. Having Ariba as part of the mix reassured us, because we were already using the Ariba® Supplier Network™, which made it a perfect alliance for us.

Hofler: How did the registration process go?

Smedberg: It happened very fast. The Receivables Exchange was strict and fair and incredibly thorough in its due diligence to check us out. We also received excellent customer service. The people we worked with answered all our questions, and their Liquidity Desk made it easy to create the best auction to get our lowest cost of capital. So Ariba Receivables Financing was there when we needed it to help us with what otherwise might have been a catastrophic situation.

Hofler: What are the biggest benefits you see in Ariba Receivables Financing?

Smedberg: It offers less risk and a lot more control than we'd have otherwise. Instead of having to depend on our customers or other resources–which frankly are pretty limited these days–we can initiate the process ourselves whenever we have a cash need. Plus we can set up the auction time frames and dictate the maximum discount we're willing to accept, so there aren't any big surprises.

Also the rates are a lot better. Ariba Receivables Financing just charges a low daily rate–and only for the days until the receivables are paid by the customer. This is in stark contrast to a factor's terms, which are annualized at around 36 to 42 percent no matter how quickly your receivables are paid. And because it's a competitive bidding process, you have multiple buyers working to win the right to purchase your receivables, which really helps drive down the cost of capital. It's faster, too: you can start submitting your receivables as soon as you're approved, and usually get paid in a day or so after the auction is done.

Hofler: What marketplace factors make this a good solution for your company right now?

Smedberg: A lot of our customers are lengthening their terms of payment. One of our biggest customers has recently gone to net 60, and another is net 45. We never used to ask for money down, but now we have to. It's only natural that as credit remains tight, larger companies are going to squeeze their smaller suppliers. Before Ariba Receivables Financing, we would have been stuck. Now we have a viable, affordable alternative to help us smooth out our cash flow and stay focused on running our business.

Hofler: What sources have you previously used to obtain cash, and how many of those do you still rely on?

Smedberg: Really we've just had our credit line at the bank, but the banks are in worse shape than we are, so depending on them is risky.

We never had to go for credit lines in the past, but now we're working on larger projects. We're projecting an additional $1 million in revenue this year from work on new infrastructure projects for our customers–building roads and bridges and so on—as a result of the government stimulus package. So we've had to obtain a line of credit based on those budgets.

Hofler: Would using your bank line of credit have been a viable option in the Christmas payroll situation?

Smedberg: No, the bank would not have been able to lend us that money. And other suppliers are in similar straits.

Hofler: Would you recommend Ariba Receivables Financing to other companies?

Smedberg: Definitely. There are so many suppliers in the same predicament we were in; everyone is looking for capital, but they've had nowhere to turn and no trusted source to help with cash flow. With all the drastic economic changes going on these days, it's nice to know there's a place to go where you can feel comfortable, especially if you're familiar with Ariba. So this is good news to pass along to them.

Hofler: Do you think you'll keep using the solution in the future?

Smedberg: Yes, we certainly plan to use it more. We see it as a valuable resource for our business.