Both Coca-Cola Co (NYSE:KO) and Boeing Co (NYSE:BA) are asked by the US SEC to inform about supply chain financing deals. According to SEC, the supply financing method frees up cash for the companies but also hides the potential risks from shareholders.
The securities regulator sent letters to both companies in June 2020 to provide more details of the supply financing arrangement. Funding providers such as Banks usually come forward to pay the amount due to the suppliers at a discount and then collect the companies’ balance.
Coca-Cola received a letter from the SEC in June 2020 after the regulator noticed an increase of $1.1 billion in accounts payable last year. An increase in payables is because of a surge in bank financing for the supply chain for extended payment terms. SEC understood from this activity that Coca-Cola is using supply chain financing in its business.
Banks generate $12.7 billion through reverse factoring
According to Coalition, a research firm, the banks gained $12.7 billion in H1 2020 because of supply chain financing. Invoices worth over $350 billion are expected to be involved in the reverse factoring.
Suppliers receive payments earlier
Under the supply finance arrangement, the vendors usually receive their payments much earlier and offer them cash to run their businesses without taking loans. According to the securities regulator, it is a popular financing method for the companies but likely to cause risks to investors.
Records supply finance in accounts payable
Companies like Coca-Cola and Boeing shows the amounts paid to the suppliers through supply chain financing under the head accounts payable in their financial statements. However, such an arrangement poses a risk if the banks suddenly pull the financing.
Guidance from SEC on short term financing
The SEC increased the scrutiny of supply chain financing in 2019. On the eve of coronavirus pandemic-related disruptions, it gave the company guidelines on short-term financing and supply chain financing deals. The regulator asked the companies to ensure transparency in finance deals.
An Assistant Professor at an Irvine’s Paul Merage School of Business, Ben Lourie, said the companies do not provide information on supply chain financing their financial statements at all. According to him, investors are in the dark when they build risk models and valuation in choosing investment companies.
Graphic Packaging Holding Co, a paper container maker based in Atlanta, received a letter from the SEC in March 2020, to disclose financing details. Masco Corp, Procter & Gamble Co, and Keurig Dr. Pepper Inc. also received similar letters from the US SEC in 2019.