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Matt Levine wrote about this topic on his newsletter yesterday. He went into more detail and a funny situation that came up, but from what I can tell Greensill

Matt Levine wrote about this topic on his newsletter yesterday. He went into more detail and a funny situation that came up, but from what I can tell Greensill (company he focused on) and pipe are doing very much the same business model. "A basic dumb rule of thumb for big companies is that investors (1) do not like debt (ooh, scary debt), but (2) love accounts payable (ooh, you’re so powerful and so efficient with your cash, you can get your suppliers to wait a long time for payment so you can hang on to your cash). So transforming “debt” into “accounts payable” is a good accounting trick; it makes a company look more valuable, without actually changing anything of substance. Good accounting tricks are worth money, to big companies, and Greensill could profitably sell this trick." I understand the time value of money and all that, but at a certain point it really feels like a waste to do all this financial voo-doo. Like, if a company wants to change from 30 to 45 day payment terms, I have to take my standard price if someone pays immediately, then adjust for 45 days, and possibly factor in that they won't pay on time anyways because they're a megacorp and have no reservations about stretching accounts payable on a small business. I can always sue them, but it'll be small-time lawyers versus big corporation lawyers, and I'll be burning the bridge if I do so. How much effort is spent trying to collect payment for no-BS "we performed to the letter of the contract, you agree, so pay us as the contract stipulates" situations? It'd be nice if companies would pay at time of service, across the board, but any one company trying to do this would get the short end of the stick. While their suppliers would be enthusiastic, their customers wouldn't want to switch. https://www.bloomberg.com/opinion/articles/2021-03-10/citi-is-still-mad-about-that-500-million https://www.bloomberg.com/opinion/articles/2021-03-10/citi-i...

ectopod 6y ago
Unusally, I think Matt Levine's explanation is confusing. > Big companies buy stuff from smaller companies, and have to pay for the stuff within, say, 90 days after delivery. Greensill pays the suppliers, say, 30 days after delivery, but at a discount; the big company now owes the payment to Greensill. It pays the full amount, to Greensill, 90 days after delivery. Greensill has effectively loaned money to the big company; the difference between the discounted price that Greensill pays and the full price it receives is effectively interest on that loan. This seems backwards; the big company isn't borrowing anything. In conventional factoring small companies make these deals to get their cash early, and they give up a percentage as payment. It makes no difference to the big company, which pays the same amount after 90 days either way. Unless... the big company is working with the finance company to actively sell these deals to their suppliers. In which case the big company will be getting a slice of the percentage fee paid by the small company. Levine concludes: > The thing about Greensill’s business is that it doesn’t sound that … hard? Like, once you have introduced a customer to the idea of supply chain finance, I am not sure why the customer should be particularly loyal to you. Anyone who offers a better rate, or the same rate but a better promise not to blow up, should be fine. This emphasises the point that this is normally nothing to do with the big company. The small suppliers can go elsewhere. There's something I'm missing here, and I think Levine is too.

ectopod 6y ago

Unusally, I think Matt Levine's explanation is confusing. > Big companies buy stuff from smaller companies, and have to pay for the stuff within, say, 90 days after delivery. Greensill pays the suppliers, say, 30 days after delivery, but at a discount; the big company now owes the payment to Greensill. It pays the full amount, to Greensill, 90 days after delivery. Greensill has effectively loaned money to the big company; the difference between the discounted price that Greensill pays and the full price it receives is effectively interest on that loan. This seems backwards; the big company isn't borrowing anything. In conventional factoring small companies make these deals to get their cash early, and they give up a percentage as payment. It makes no difference to the big company, which pays the same amount after 90 days either way. Unless... the big company is working with the finance company to actively sell these deals to their suppliers. In which case the big company will be getting a slice of the percentage fee paid by the small company. Levine concludes: > The thing about Greensill’s business is that it doesn’t sound that … hard? Like, once you have introduced a customer to the idea of supply chain finance, I am not sure why the customer should be particularly loyal to you. Anyone who offers a better rate, or the same rate but a better promise not to blow up, should be fine. This emphasises the point that this is normally nothing to do with the big company. The small suppliers can go elsewhere. There's something I'm missing here, and I think Levine is too.