Receivable Savvy is taking a closer look at a variety of early payment options that supplier organizations can use to expedite the payment of outstanding invoices. There are multiple early payment options to choose from in the form of Dynamic Discounting, factoring, P-cards, static or flexible terms, and more. Early payment may also be initiated by the buying organization, the supplier organization or third-party solution providers. We investigated Dynamic Discounting late last year. Today we’ll look at Supply Chain Finance, how it works, how it might benefit the supplier as well as the buyer and identify some of the key providers in the market. Although Supply Chain Finance is sometimes used interchangeably to describe a variety of early payment solutions, we’ll identify and describe the widely accepted term for the purposes of this piece.
What is Supply Chain Finance?
To the supplier, Supply Chain Finance might look very similar to Dynamic Discounting, but there are several variations behind the scenes in terms of how it works, the funding source and the kind of discount the supplier agrees to. Like Dynamic Discounting, the supplier may leverage their customer’s portal to manage their invoicing and payment receipt activities. Unlike Dynamic Discounting, Supply Chain Finance allows the customer to leverage a variety of funding sources behind the scenes to pay the invoice early – either from a third-party such as a financial institution or cash that the customer may have on hand and or allocated to an early payment initiative where they hope to “invest” those funds for a specific ROI.
How Supply Chain Finance Benefits Suppliers
Supply Chain Finance is designed to be mutually beneficial, providing value for buyer and supplier organizations. Although a supplier will likely not be able to tell how the early payment is being funded, that distinction is important to the buying organization due to their financial objectives. Similar to other invoice finance solutions, Supply Chain Finance can be a useful tool for the supplier if used properly. Suppliers value early payment, allowing them to maximize cash flow and fund organizational objectives such as plant expansion and acquisitions. Furthermore, where Dynamic Discounting may be best suited for small and mid-size suppliers, Supply Chain Finance solutions are typically configured for larger, more strategic suppliers.
Finally, the Supply Chain Finance APR may typically be lower for suppliers than many Dynamic Discounting solutions. Because there are multiple variables related to a Dynamic Discounting solution for suppliers (supplier size, strategic value, early payment timetable, etc), there may not be nearly the flexibility for Supply Chain Finance solutions. Therefore, more limited discounts may be offered by the buying organization using this method of early payment but that lack of flexibility may mean better rates.
Drawbacks for suppliers
One of the drawbacks of Supply Chain Finance can be the cost and complexity of the solution. It can be difficult to understand the details of the agreement as well as how discounts and the corresponding rate might be applied by the buyer. Where Dynamic Discounting tends to be fairly straightforward for the supplier (simply choose a payment time and a corresponding discount via a sliding scale), Supply Chain Finance solutions may require significantly more onboarding and steps in order to receive early payment.
Another potential drawback for the supplier may be restrictions related to the number of early payments received. If funding is handled by a financial institution, that institution works on behalf of the buyer and their own financial interests, meaning they can set a limit of how many invoices will be accepted in a month. Furthermore, a customer may set aside a specific amount to use toward early payment. Once that amount is realized, customer-funded early financing may be curtailed until the next financial cycle.
Benefits for Buyer Organizations
By paying less than the original invoice amount prior to the due date while also leveraging a third-party funding source, the buyer has the ability to hold onto their cash a little longer and extend their Days Payable Outstanding. If buyer organizations have enabled their suppliers to leverage some form of electronic invoicing to help ensure automation, leveraging Supply Chain Finance can further reduce manual intervention and further reduce costs. This may also result in redeployment of staff and reduction in associated costs. Supply Chain Finance solutions can also serve to strengthen the relationship between buyers and their suppliers by significanlty reducing instances of late payment.
Major Third-Party Providers of Supply Chain Finance
Supply Chain Finance is one of several ways suppliers and buyers can improve their respective cash flow situations and strengthen their business relationship. Major third-party solutions providers offering some form of Supply Chain Finance include:
- Ariba http://www.ariba.com/solutions/financial-supply-chain-management
- Basware http://www.basware.com/solutions/financing-services
- C2FO https://c2fo.com/
- Orbian https://www.orbian.com/
- PrimeRevenue https://primerevenue.com/products
- Taulia http://taulia.com/en/
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.