New SCF solutions are offering a range of tools to help suppliers manage working capital and diversify funding sources.

As the recent financial crisis ebbed, many large multinationals found themselves holding on to big sums of cash that were producing little, if any, return. At the same time, some smaller companies still found their access to capital constrained. One result? Growing interest in supplier financing. While the various solutions operate somewhat differently, “the final objective is to allow suppliers—normally, small and medium businesses—to access cash before the due date” of their invoices, says Enrico Camerinelli, senior analyst for the wholesale banking practice with Aite Group.

Vendors in the space are changing their offerings to provide more holistic solutions to suppliers. Aside from the traditional goals of allowing suppliers to reduce days sales outstanding (DSO), while letting their corporate buyers increase days payables outstanding (DPO), new solutions also allow suppliers to use a number of different tools to manage working capital and access new sources of funding.

“Diversification of funding is a key need of customers,” says Paul DeDomenico, head of the global corporate receivables program with the Receivables Exchange, an electronic exchange for the sale and purchase of accounts receivable.

In addition, the technology available through many of the new systems brings greater efficiency, visibility and scalability to the invoice and payment processes. A critical shortcoming of many previous solutions was the difficulty all but the largest supplying organizations had in implementing the systems, says Bertram Meyer, chief executive officer with dynamic discounting platform Taulia.

Another benefit of holistic tools for supplier financing: They help corporates develop more sustainable supply chains. “This allows buyers at the top of the equation to move cash to their suppliers’ suppliers and strengthen the entire supply chain,” notes Alexander Kemper, chair and CEO at vendor C2FO.

There are three key types of solutions on offer: buyer-agnostic, buyer-centric—and a blend of both. Buyer-agnostic solutions offer a technology platform that links suppliers and potential funding providers, such as banks, pension funds and other large corporations. On the Receivables Exchange, for example, the supplier looking for working capital can place some or all of its receivables on the market, establish an acceptable price range—say, a discount of Libor plus 75 to 100 basis points from the value of the invoices—and have multiple banks and/or investors bid on them. The companies can request that certain buyers or buyer segments be blocked from their auctions. “Accessing funds goes from one-to-one to one-to-many,” says DeDomenico. 

In buyer-centric solutions the large corporate sets up a program specifically for its suppliers and may provide the financing themselves (in the form of early payments for discounted invoices or more direct financing), get a single financing partner to provide the funding, or work with a solution vendor who handles the financing partners.

Then there are the blended solutions—which let supplier access funding from their buyer—via invoice discounting—or from a group of potential funders that the platform vendor works with.

For example, large buying organizations can offer Taulia’s dynamic discounting service to suppliers, who can choose to post any or all of their invoices for early payment. Taulia handles the supplier onboarding process; after that, suppliers can connect to the system via a web portal. Payment can come from a financing partner or from the supplier’s customer, who can pay early and reap a discount. Suppliers also gain a real-time window on the status of their invoices.

As another example, C2FO is an on-demand, collaborative working capital exchange. “We route orders for early payment of cash from suppliers to their buyers,” Kemper says, adding that C2FO functions similarly to BATS (an equity market operator) or the NYSE, which route orders for stocks between buyers and sellers. Most of the discount offers on accounts receivable placed with C2FO are between 50 and 150 basis points. Most of C2FO’s transactions occur between suppliers and their buyers, but third parties—such as financial institutions or even large, cash-rich corporations—also can provide funding. These third parties provide a loan to the supplier based on their outstanding receivables. When the supplier is paid for these invoices, they also repay the loan, Kemper explains. In the last quarter of 2013, C2FO accelerated payment on about $1.1 billion of invoices and cut 7.5 million invoice days for suppliers, Kemper says.

Another player offering a holistic solution, PrimeRevenue, operates a Software as a service interchange of buyers, suppliers and funders. The solution, which can link to buyers’ enterprise resource planning (ERP) systems, enables suppliers to log on to the system and track the status of their invoices. Suppliers can choose to be paid earlier than the negotiated terms, says Oliver Belin, marketing director with the US-based firm. If they do, PrimeRevenue contacts potential funders—it works with about 50—to accelerate the payment, less a discount. On the invoice’s actual due date, the buyer pays the full amount to the funder. The difference between this amount and the amount received by the supplier is shared between the funder and PrimeRevenue. 

Given the benefits of these new solutions, it’s not surprising that supply chain financing implementations are becoming a common fixture within many companies. More than 40% of respondents to an Aberdeen study released in early 2013 said their organizations had supplier financing initiatives in place. 

Although new SCF solutions can benefit both suppliers and their corporate customers, they’re not without concerns. For companies that purchase receivables, one issue is whether such a transaction will mean they have to reclassify their accounts payable as financial debt. This is of particular concern in the US and Europe, Camerinelli says. Several steps can cut the risk that a reclassification is necessary, he notes. For starters, the relationship between the funding providers and the suppliers should be arm’s length, he says. That is, a large buying firm can inform its suppliers of a program to accelerate payments, but shouldn’t influence suppliers’ decisions whether or not to use it.

Another potential red flag: If the interest the company purchasing receivables earns on the funding rises too high, the transaction might be viewed as transforming its accounts payable into financial debt. That’s because the company could be seen as leveraging the role of the bank as a financial provider, Camerinelli says. 

To be sure, companies need to take the steps necessary to ensure that their use of a supply chain financing solution doesn’t inadvertently alter the proper classification of their accounts. At the same time, the potential benefits of these solutions are compelling. Companies can offer suppliers the opportunity to accelerate payments, while both strengthening their supply chain and (potentially) earning a return on their funds. Moreover, both sides reap the benefits of greater visibility and efficiency.

Coca-Cola Bottling Company Tames Its Invoicing Processes

When Coca-Cola Bottling Company, which distributes Coke products in the southeastern US, wanted to tame the approximately 100,000 invoices it processed each year, it turned to Taulia, says Steven Richards, AP manager. Since it implemented Taulia’s invoice discounting solutions, CCBC’s suppliers can use the vendor portal to easily check the status of invoices and future payments. That cuts down on phone inquiries to the AP team.

In addition, some vendors can choose whether they’d like to be paid before the negotiated deadline, at a discount, Richards adds. The company’s treasury department controls this program, identifying the suppliers eligible for it and the maximum amount of discounts available each day. That way, if CCBC management decides it needs to hold on to cash, it can quickly halt the program.

Although CCBC hasn’t altered its payment terms, invoices are ready for payment several days sooner. “We believe we have picked up at least five working days (payable outstanding),” Richards says.

Finally, even suppliers that don’t request early payment can benefit from the portal’s ability to let them view the status of their invoices. “It adds some structure to the relationship,” Richards adds.

Breaking It Down

With interest in supplier financing growing, the range of services on offer has also grown. There are various mechanisms now available:

  • Companies can work with a single financial institution to set up an SCF program where the bank will buy receivables from or make loans to suppliers—providing funding to the supplier at a lower-than-bank rate as the supplier can take advantage of the credit rating of its buyer (the payer on the receivable). Often these are managed via a bank portal.
  • Buyer-financed programs: Invoice discounting allows suppliers to get paid earlier by accepting a discounted payment amount from their buyers (with dynamic discounting, suppliers are offered a range of discounts based on when in the cycle the buyer pays). A number of vendors offer solutions to support this option, and new platforms allow such programs to be managed via a portal.
  • Buyer-agnostic platforms allow suppliers to get funding from investors—which can include banks, other investors, and corporates.
  • Traditional supplier receivables financing solutions can include such tools as factoring, forfaiting and other asset-based financing programs.