South Korea’s tech giant Samsung Electronics Co. will set up a 500 billion won ($447.5 million) worth fund with local banks that can be borrowed by its first-tier suppliers to settle payments to its second-tier suppliers in cash in a move to help improve money flow in smaller players.

Samsung Electronics said on Thursday that it will introduce a payment process next month in which first-tier suppliers provide cash to second-tier suppliers within a month for the goods that have been ordered.

To facilitate the process, Samsung Electronics plans to create a 500 billion won fund with Hana Bank, Shinhan Bank, and KB Kookmin Bank that first-tier suppliers can borrow to provide cash payments to second-tier suppliers without difficulty. The new initiative is expected to eliminate payments in promissory notes that have often led to slow circulation of funds for second-tier suppliers.

Samsung Electronics has been providing cash payments to first-tier suppliers since 2005. But promissory notes are still widely used as a form of payment between first- and second-tier suppliers.

When a first-tier supplier applies for a loan to one of the banks, the financial institution will provide a one-year, interest-free loan worth up to the monthly payment that the first-tier company owes to its second-tier partner through the fund. Loans can be extended by another year if needed.

Samsung Electronics plans to manage the fund for three years until May 2020 to set the scene for payments to be settled in cash in 30 days. The country’s largest conglomerate plans to consider extending the fund operation upon request from suppliers.

An unnamed official from Samsung Electronics said cash payment is not mandatory, but the company will do its best to encourage its suppliers to take part in the new initiative as much as they can.

By Song Sung-hoon

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