General Motors and Ford Motor are utilizing fast-payment programs set up with financial lenders to help cash-strapped small suppliers survive production shutdowns caused by the spread of the coronavirus pandemic.
Keeping small suppliers afloat financially is important for the automakers as they try to resume North American factories and generate cash from sales of large pickup trucks and sport utility vehicles.
The programs pay suppliers up front for bills that generally take 40 to 60 days to settle. For many suppliers, checks for the recent work done before the shutdown of North American auto plants arrived previously this month, and no new payments would land until July or August.
GM started its “Early Payment Program” on August 2019 with Wells Fargo, and now is using it as a way to support suppliers during the coronavirus crisis, especially as they present new technologies, GM spokesman David Barnas said. GM operated a similar program with General Electric before 2008.
Under the deal, a supplier gets paid from Wells Fargo for the full invoice, after paying a financing fee. General Motors later pays Wells Fargo the full amount. Ford’s program works similarly.
GM said the cost of financing under its program is connected to the automaker’s credit rating and not the supplier’s, permitting the smaller companies to leverage the automaker’s financial strength and achieve lower costs. It did not reveal other financial details.
Seventeen suppliers took part in GM’s program and another two dozen are in discussions to join as interest has boosted during the COVID-19 outbreak, Barnas stated.
Some supplier executives and experts compared the potential cost of taking accelerated payments to credit-card debt. Some of these programs can cost more than a line of credit with interest rates in some cases going as high as 3% to 4% per 30 days.
“It is not a silver bullet,” stated Scott Eisenberg, partner with restructuring advisory firm Amherst Partners.
The pressure on suppliers may only boost in the third quarter as banks pull back on making loans, Eisenberg stated. “If we have this second (coronavirus) wave in the fall, the access to capital that everyone had in March won’t be same in September and October.”
Bob Roth, co-owner of RoMan Manufacturing, which makes transformers and glass molding items in Grand Rapids, Michigan, stated that companies with stronger balance sheets, like his, can avoid such deals. But others are left with no option.
“The cost of such deals compared to the cost of being out of business is not really a choice,” he stated.
Ford started its program in the last week, at first it was started with a small group of suppliers that ship to its U.S. plants with the intent of expanding more broadly in the future, spokeswoman Jennifer Flake stated.
Ford is collaborating with London-based Greensill, which provides working capital finance for businesses worldwide, and financial technology company C2FO, she said. Greensill refused to comment.
Fiat Chrysler Automobiles stated only that it is using “myriad” approaches to support suppliers that are having a hard time during this time.