The financial crisis may have been a disaster for the global economy, but it did accelerate innovation in supply chain finance. Restricted bank lending meant businesses wanted to extend payment terms, while suppliers needed invoices settled more promptly than ever before.
These competing forces, combined with new technology platforms, have helped the market move beyond simple bank lending. Yet, eight years on from the crisis, many suppliers are still faced with lengthening payment terms and problems getting hold of finance.
Some 77% of UK firms have not been offered access to any new innovative financing scheme, according to research from YouGov in association with PrimeRevenue, a supply chain finance platform, and insurance giant AIG. The study also found that over the past year, 28% of UK firms have seen an increase in demand for extended payment terms from buyers, with 47% of firms saying that extended payment terms were a problem for them.
“Since the financial crisis, a lot of banks have been restricted as to what they can lend and where they can lend, while the actual cost of lending has gone up due to the new rules on how they apply capital. The cost of banks operating in this area is very expensive, therefore, they are selective,” says Robert Barnes, founder and commercial adviser of PrimeRevenue.
This has encouraged the development of a number of alternative financing methods, he says.
Neil Ross, AIG’s regional manager in EMEA for trade credit, says that since the crash, buying organisations have been put off relying on one funding partner and are looking for a more diverse funding base for supply chain finance. But, he adds, globalisation is also playing a role in demand for new forms of financing.
“There is more competition now and margins are being increasingly squeezed, so companies want to be more efficient in how they fund working capital. There is also a lot of volatility around the world and companies need different funding methods, so they can ensure continuity of supply.”
Financing the supply chain
Gert van der Heijden, senior director of procurement consultancy 4C Associates, says supply chain financing schemes have been accelerated by the advent of more efficient procure-to-pay (P2P) processes, supported by new software.
“Matching invoice to order took a long time and there were no options for small payments, no alternatives on payment terms. Now we can process an invoice much faster than before and, therefore, people start to think about supply chain finance for the parts not traditionally taken up by banks,” he says.
The biggest benefit from this form of supply chain finance is to smaller suppliers, he says, as they are the ones that find it hardest to access finance, while large contracts can make cash flow difficult to manage.
But, for the procurement team, it can also help to build stronger supplier relationships. “If the procurement team has helped them access the tools, then they can become a preferred customer,” he says.
However, the buying organisation needs to get its P2P processes in order before it can take advantage of many of the supply chain finance tools on the market. “It is putting pressure on procurement to get their processes right. They are really struggling with this: P2P is one of the weakest areas in procurement. It is not in the interest of sourcing or procurement people to deal with it. In a lot of cases, it is pushed to the finance team. Finance creates a solution to scan invoices, but that’s not solving the problem,” says van der Heijden.
As P2P has become more efficient though, it has opened up opportunities for a number of new firms to enter the supply chain finance market.
Pay it back to pay it forward
Tradeshift is a supplier network with more than 500,000 members, processing $47bn worth of transactions and some 30 million invoices each year. A relationship with Citibank supports reverse factoring, where the invoice is financed on the strength of the buyer’s credit rating, while a partnership with C2FO, an online network, supports dynamic discounting of invoices. Instead of buyers setting the invoice discount rate, C2FO and Tradeshift support a day-to-day bidding market of discounts to match buyers’ and suppliers’ needs, says Christopher Lee, product manager for financial solutions at Tradeshift.
Another online business network, GT Nexus, also offers dynamic discounting, this time funded by the buyer. But it has started going one step further and offers supply chain credit on a purchase order instead of just the invoice, giving suppliers access to finance much earlier.
Kurt Cavano, founder and chief strategy offer at GT Nexus, says that the company has been managing transactions and supply chain activity for some of its clients for as long as ten years. By analysing the data, it has been able to help speed up payments. It partners with merchant banking firm Seabury to finance the early payment of purchase orders before an invoice has even been submitted.
“We have the history of buyer-seller payment relationships. By looking at the statistics and doing analytics, you can determine the quality of a relationship and the basis on which you can lend,” he says.
This means suppliers can get half of a purchase order value upfront at a favourable rate.
While some systems require integration with buyers’ P2P systems, MarketInvoice, which was launched in 2011, offers a market of institutional investors the opportunity to pre-select invoices they want to invest in based on rates of risk and return. It is a peer-to-peer lending system that bundles groups of investors to lend on groups of invoices, such that the risk for invoice finance will be spread across a range of suppliers (see box, Innovations to watch out for in supply chain finance). It trades around £550m in invoices each month and supports 1,400 clients.
Instead of requiring integration with accounts payable or enterprise resource planning (ERP) systems, MarketInvoice is designed to be ‘light touch’ from the buyer’s point of view, says partnerships manager Oliver Cummings. Buyers merely validate the invoice, which can be automated in e-invoicing systems, he says.
Suppliers can sign up online, sell an invoice and draw down funds on the same day without a contract or any personal guarantees.
Taulia runs a similar service, but integrates the buying organisation’s back-office technology, through off-the-peg connectors to popular ERP systems. Buyers can pay invoices early – at a discount – using their own cash, or use a market of institutional investors to fund the lending based on the buyer’s credit, Taulia co-founder and chief product officer Markus Ament says.
Because the invoices have been validated by the buyer, Taulia is able to offer finance to small suppliers at a good rate, such as 6%.
“Our cost of capital is still the default risk of [our Fortune 500 clients], which can be as little as 2% annually. It is great for the supplier, as they can finance liquidity at 6%, which would be impossible directly through the banks after the financial crisis.”
Meanwhile, because of the spread between the interest for lending and borrowing, Taulia is able to share the proceeds with the buyer.
“They are making margin here. The buyer gets a discount without using its own working capital. The combination of those two things was not possible before. It is now,” says Ament.
Taulia deals with $75bn annually and has around 100 firms in its network including Coca-Cola Bottling, Henkel, Bell and Premier Foods.
While innovation in supply chain financing has proved successful in helping suppliers access cash through invoices or purchase orders, longer-term solutions have been more elusive and have seen less innovation, says Gerard Chick, chief knowledge officer at consultancy firm Optimum.
“Procurement is having to get more involved in the money side of things, including supply chain finance. It has to become more commercial and that’s a good thing,” he says.
Innovation in supply chain financing is easing cash flow in supplier organisations and has allowed buyers to retain extended payment terms without disrupting supplier relationships. Helping suppliers access these new forms of finance, though, can also boost a buyer’s preferred customer status.
However, it seems that for the time being, those looking for finance to make strategic investments will still need to go to the bank.
Dynamic early-payment discounting
Automated procure-to-pay (P2P)systems and supplier networks allow purchase order matching and invoice approval within hours. This means suppliers can access cash, and buyers get an early-payment discount, based on an agreed sliding scale.
Dynamic discounting through a marketplace
Another approach to dynamic discounting, also dependent on a rapid and efficient P2P process, creates a daily market for early-payment discounts, matching the supplier’s need for cash with a buyer’s desire for a discount.
Example: C2FO and Tradeshift
Peer-to-peer invoice lending
While invoice finance has been largely supported by bank lending, new models are emerging that allow the supplier to “sell” an invoice to a market of institutional investors and private individuals. Multiple investors buy stakes in a range of invoices, spreading risk. Buyers only need validate that the invoice is theirs.
Example: MarketInvoice. Taulia supports this model and offers buyers a slice of the interest earned.
Purchase order finance
Historical transaction data creates a powerful predictor of the likelihood of a purchase order ending in a payment. Analysis of this data allows investors to offer finance on the basis of a purchase order, further easing supplier cash flow.
Example: GT Nexus
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