The ULTIMATE GUIDE to SUPPLIER FINANCING
Table of Contents 01 introduction 02 what is supplier financing? factoring reverse factoring prompt payment discounting dynamic discounting supply chain finance plus 03 finding the ideal solution 04 conclusion
Introduction Financing is a fundamental need for every business. Without it, companies go bankrupt and cease to exist. However, with sufficient cash, the opposite happens: the business thrives. They develop new products, invest in new equipment, and hire more employees. While understanding common sources of capital is common knowledge among finance professionals, most others have very little understanding of alternative financing options. Based on in-depth conversations with industry analysts, as well as findings from various industry reports including Ardent Partners epayables: The Quest and PayStream Advisors Working Capital Management, this guide defines, dissects and simplifies supplier financing and the benefits it can provide. This guide is broken up into three sections: The Definitive Guide to Supplier Financing - Fully understand each approach in detail, including all of their benefits and key challenges. Finding and Implementing the Ideal Solution for your Organization - Ready for a supplier financing solution, but not sure where to start? Use this side-by-side comparison of the different methods and examples of how each approach can be used most effectively. Current Supplier Financing Trends & Predictions for the Next 5 Years - Learn the current industry trends and our bold predictions about the future. By the end of this guide, you will have a comprehensive understanding of supplier financing. We hope it helps you bring your business to the next level! PAGE 3
Defining Supplier Financing In all types of supplier financing, there is a buyer (the customer) and a supplier. The buyer purchases products and services from the supplier. For each product or service the buyer purchases, they must eventually pay the supplier. However, when businesses buy from other businesses, it can take a long time for them to pay, commonly ranging from 30 days to 120 days - and sometimes more. Supplier financing describes various methods that enable suppliers to receive payment earlier than they otherwise would. Every solution discussed in this guide can be defined as a form of supplier financing. Some methods have multiple terms, while other terms can mean different things in different countries. So let s get this ironed out. Factoring: Also known as Receivables Financing, Factoring is the practice of selling receivables to a lender for a percentage of their face value. A bank or financial institution funds the early payment. Reverse Factoring: Also known as Approved Payables Finance or Confirming, Reverse Factoring is similar to Factoring, but is established by the buyer instead of the supplier. Reverse Factoring is often called Supply Chain Finance or SCF in the United States. However in Europe, Supply Chain Finance has an even broader meaning and is synonymous with supplier financing in general. A bank or financial institution funds the early payment. Prompt Payment Discounting: Also known as Early Payment Discounting or Early Payment Terms, Prompt Payment Discounting is commonly thought of as 2/10, Net 30. A discount is negotiated into contracts that allow buyers to pay early, at their own discretion, in return for a discount. The buyer funds the early payment. Dynamic Discounting: Also known as Dynamic Payables Discounting, Dynamic Discounting is similar to Prompt Payment Discounting except that the payment can be made at any time between invoice approval and the net due date with the discount adjusting based on a sliding scale. The buyer funds the early payment. Supply Chain Finance Plus: Leveraging the strengths of both Dynamic Discounting and Reverse Factoring, Supply Chain Finance Plus allows suppliers to choose to be paid early in exchange for a discount, but gives the buyer the option of paying the invoice with their own cash or having a third-party fund it. Now that we re clear on the terms, lets go into each solution in a bit more detail. PAGE 4
Factoring The global factoring market is growing 28.6% annually, currently exceeding $3 trillion. Though the majority of factoring occurs in Europe, it is present and growing throughout the world. HOW IT WORKS 2013 2012 2011 2010 2009 Domestic International There are a few different 0 500 1000 1500 2000 2500 variations of factoring: some Figures in Euro Billion lenders hold an escrow or reserve, while others provide financing on purchase orders or invoices. To keep things simple, we ll explain the basic, and most common version of invoice factoring. The process of factoring has two parts. First, the factoring relationship needs to be established. STEP 1: The supplier contacts the lender to establish a factoring relationship. STEP 2: The lender and supplier sign a Receivables Purchase Agreement (RPA) outlinging the terms of their factoring relationship. It is not uncommon for these contracts to include 2-year commitments for all invoices between the supplier and the buyer. STEP 3: From here, the lender goes back to the buyer and has them change their Accounts Payable process so that future payments go to the lender instead of the supplier. Once step 3 is complete, the factoring relationship is established and can be leveraged for financing. PAGE 5
Factoring Using a simple example of a $100 product being purchased from the supplier, the Purchase-to-Pay (P2P) process looks as follows in an established factoring relationship: STEP 4: The purchasing process remains unchanged. The buyer sends a purchase order for $100 to the supplier. STEP 5: After producing and shipping the product, the supplier invoices the buyer for $100. On the invoice, the remit to address will be the lender s, but otherwise the process is unchanged so far. STEP 6: The supplier will send a duplicate copy of the invoice to the lender and will request to be paid early. STEP 7: The lender sends the supplier $97 dollars immediately. This is the full amount of the invoice, minus a discount. STEP 8: When the invoice is paid at the net due date, the buyer sends $100 to the lender, instead of sending it to the supplier. In factoring, the lender is providing the funding for the invoice before they receive payment from the buyer. Between step 7 and step 8, the buyer still has its $100 in cash and the supplier has $97 in cash. Both parties are able to use this as working capital to fund their business, because the lender is short $97 in cash, plus their $3 in profit. Since the time between sending the invoice and the net due date can be weeks or months, factoring can add significant liquidity into the supply chain during this time. WHY USE FACTORING? Suppliers generally enter into factoring relationships for two reasons: risk reduction and to obtain cash to fund their business. RISK REDUCTION: A factoring relationship can eliminate customer risk as the supplier gets paid immediately upon receipt of the invoice, shielding them from possible risks transpiring between that date and the net due date. For example, if the buyer goes out of business, the lender does not get paid, but the supplier still does. This particularly applies to suppliers who have a small number of buyers that make up the majority of their business, as invoices going unpaid could put the supplier out of business. OBTAINING CASH: Payment terms from the buyer can be as long as 60, 90 or 120 days after receipt of an invoice. When suppliers are unable to wait to get paid, selling their receivables to a lender allows them to get paid immediately in exchange for a discount. For many suppliers who have little to no credit available, factoring can be a way of securing cash. For buyers, factoring is beneficial as it injects liquidity into the supply chain, enabling their suppliers to access the cash they need to support the growth of their business. PAGE 6
Factoring CHALLENGES WITH FACTORING One of the primary challenges with factoring is the costly rates charged by the lender -- typically between 30-40% APR, depending on the amount of risk involved. For some types of factoring such as purchase order factoring, these rates can be dramatically higher. Another challenge is that suppliers may find it difficult to exit the factoring relationship. Given the time and effort put in for due diligence, the factoring agreement often binds the supplier into a contract for multiple years. The only way to exit is to buy out the contract or wait for it to expire, giving little to no flexibility if the supplier is able to find alternative financing that is more affordable. Challenges for the buyer include additional work and process changes, as the buyer must validate the relationship with the lender and change its accounts payable process in order to pay the lender. Factoring is relationship and operation heavy. The process is not simple and it is time consuming. David Gustin, Spend Matters PAGE 7
Reverse Factoring Traditional reverse factoring, with a large bank as the financier, has been around for over a decade. However, the reverse factoring market is relatively small compared to traditional factoring--estimated to be between $255-$280 billion globally. While this number is growing steadily year-over-year, adoption of other supplier financing vehicles may displace reverse factoring and therefore limit its future growth. HOW IT WORKS STEP 1: The buyer contacts the lender (or in many cases the lender reaches out and sells to the buyer) regarding a reverse factoring program. STEP 2: After initial contact, the lender performs detailed due diligence on the buyer to determine the risk in the relationship. STEP 3: The buyer and lender then complete a reverse factoring agreement. STEP 4: The lender then begins onboarding multiple suppliers. Each supplier that is onboarded undergoes an extensive Know Your Customer (KYC) process similar to that performed by traditional factoring. Once step 4 is complete, the reverse factoring relationship is established and can be leveraged by the supplier for financing. When the supplier chooses to get paid early, the Purchase-to-Pay (P2P) process looks as follows, using our previous example of a buyer purchasing a $100 product. STEP 5: The purchasing process remains unchanged. The buyer sends a purchase order for $100 to the supplier. STEP 6: After producing and shipping the product, the supplier invoices the buyer for $100. STEP 7: The buyer sends a duplicate copy of the invoice to the lender. STEP 8: The factor notifies the supplier that an invoice is available to be paid early and gives them the option to accelerate payment. STEP 9: Assuming the supplier chooses to get paid early, the lender sends the supplier $99 dollars immediately. This is the full amount of the invoice, minus a discount. STEP 10: When the invoice is paid at the net due date, the buyer sends $100 to the lender. PAGE 8
Reverse Factoring As with factoring, in reverse factoring, the lender is providing the funding for the invoice before they receive payment from the buyer. Between step 9 and step 10, the buyer still has $100 in cash, the supplier has $99 in cash and both parties are able to use this as working capital to fund their business. Meanwhile, the lender is short $99, plus their $1 profit. Since the time between sending the invoice and the net due date can be weeks or even months, reverse factoring can add significant liquidity into the supply chain. WHY USE REVERSE FACTORING? Buyers typically establish reverse factoring programs to increase Days Payable Outstanding (DPO). By extending payment terms in parallel with a reverse factoring program, the buyer reduces the negative impact of paying their suppliers later. For example, a company called Buyer A has a 30-day net term with all 10 of its suppliers, and it spends $120 million annually with each of these 10 suppliers ($1.2 billion in total spend). Buyer A has a strategic initiative to increase working capital and decides it will extend payment terms to net 90 days for these 10 suppliers. For Buyer A, this increases working capital by $200 million ($1.2 billion / 12 months * 2 months from the 60 day terms extension). While extremely valuable for Buyer A, it s a zero-sum game. The 10 suppliers each have $20 million less of working capital. This will often force them to borrow money, which in turn increases COGS and can result in a price increase for Buyer A. Reverse factoring can mitigate the harm done to the supply chain when pushing a terms extension. In this example, the lender would offer each of these 10 suppliers the option to get paid early in exchange for a discount. The terms would depend on Buyer A s credit worthiness, and would allow for the supplier to choose to be paid at any time between when the invoice is approved and the due date. Because Buyer A s creditworthiness is used to establish the rate, it is often more affordable than other financing options. The supplier obtains significant benefits from a reverse factoring relationship, including: Accelerated receipt of payments Improved forecasting ability Better financing rates and terms Automated payment process Reduction of credit risk PAGE 9
Reverse Factoring CHALLENGES WITH REVERSE FACTORING True value created by the solution is limited, as it only addresses the largest suppliers of a company s supply chain. Banks invest $3,000-$5,000 to onboard each supplier due to the labor-intensive and often paper-based Know Your Customer (KYC) process. For the bank, only the largest suppliers provide a large enough revenue opportunity to justify the costly onboarding process. 80% OF SPEND 20% SUPPLIERS 20% OF SPEND 80% SUPPLIERS $ REVERSE FACTORING ( NOT ADDRESSED ) In many cases, the largest suppliers are businesses that already have a strong cash position and do not need additional working capital, nor are they starving for cash to operate their business. And adversely, reverse factoring leaves the mid-level and smaller suppliers (the long tail of the supply chain) without a financing solution. When coupled with a terms extension, these smaller suppliers are often still forced to resort to other expensive short-term financing options. Reverse factoring also excludes the buyer from the discounts captured because the lender is providing the financing of the early payment and the buyer is not earning a return on the cash. If the buying organization has sufficient working capital, other programs like Dynamic Discounting or Supply Chain Finance Plus would better fit their needs. PAGE 10
Prompt Payment Discounts Prompt Payment Discounting is the most common form of supplier financing. HOW IT WORKS The early payment term is negotiated into the contract between the buyer and supplier. Once established, the buyer can leverage it at their own discretion to pay the supplier early. When the buyer chooses to pay early, the Purchase-to-Pay (P2P) process looks as follows: Using the same example of a $100 product being purchased from the supplier, we will assume that the buyer and supplier have a 2% prompt payment discount if paid before day 10 negotiated into the contract. STEP 1: The purchasing process remains unchanged. The buyer sends a purchase order for $100 to the supplier. STEP 2: After producing and shipping the product, the supplier invoices the buyer for $100. STEP 3: The buyer will then, at its discretion, choose to pay early. On day 10, the buyer pays the supplier $98. After day 10, the buyer would pay $100. Unlike factoring and reverse factoring, no additional liquidity is being added into the supply chain from prompt payment discounting. When the early payment is made, the buyer s working capital decreases and the supplier s increases. This negatively impacts the buyer s DPO (Days Payable Outstanding), while improving the supplier s DSO (Days Sales Outstanding), but adds to the buyer s bottom line by reducing costs. WHY USE PROMPT PAYMENT DISCOUNTING? For the buyer, prompt payment discounting creates an opportunity to generate millions of dollars in savings. Each prompt payment discount can significantly reduce costs and improve a company's bottom line. Furthermore, the return on cash is significantly higher than other investment opportunities available to them, especially in this near-zero interest rate environment. In a 2/10, Net 30 example, the buyer is receiving a 2% discount to accelerate payment by 20 days, or roughly a 36% APR (360 days divided by 20 days multiplied by 2%). Not only is this rate high compared to alternative investments, it is risk-free, with no chance for loss of principal, because payment doesn t happen until after invoice approval. For suppliers, benefits from prompt payment discounts come via increased liquidity. By providing an incentive for the buyer to pay early, suppliers are able to access cash. For many small suppliers, this can be very appealing because alternative financing options are often unavailable or have an even higher APR. PAGE 11
Prompt Payment Discounts CHALLENGES WITH PROMPT PAYMENT DISCOUNTING Even when negotiated into contracts, only about 30% of AP organizations efficiently capture early payment discounts (Ardent, The Quest, p.9). This is the result of significant technical and operational hurdles that limit adoption. The first key challenge for the buyer is getting the invoice approved quickly enough to pay early. Large buyers tend to have complex approval processes and are receiving a large number of invoices on paper that need to be scanned and processed via Optical Character Recognition (OCR) or manually keyed in. Since these buyers are receiving hundreds of thousands, or even millions, of paper invoices, the process can take weeks, thus making the buyer miss the early payment window. The second major challenge is that prompt payment discounting is Hit or Miss. If the buyer is not able to pay before the agreed upon date, they can no longer pay early. Let s look at a simple example with payment terms of 2/10, Net 30. 3.0% 2.5% 2.0% 1.5% DISCOUNT CLIFF 1.0% 0.5% 0% 0 days 10 days 20 days 30 days After the 10th day in this example, the opportunity to capture a discount vanishes. If the 11th day arrives and the buyer still hasn t paid the supplier, they are not incentivized to pay early as the invoice amount will remain the same from day 11 through day 30. Prompt payment discounting provides very little flexibility, resulting in missed discounts. Furthermore, there is no additional incentive to pay before the 10th day. If the buyer is able to approve an invoice on day 4, they will most likely wait another 6 days before paying early to maximize their working capital while receiving the same discount. The third major challenge with prompt payment discounting is managing payment terms across thousands of suppliers and contracts. Since prompt payment terms can vary greatly between suppliers, managing those discount terms can be complex. In addition to the hurdles faced by the buyer, suppliers also encounter significant challenges with prompt payment discounts. First, there s no visibility into knowing whether a payment will be paid early. This makes cash planning difficult, and often the lack of visibility prevents the early payment from being used productively. Secondly, a recent survey found that nearly 20% of suppliers give an early payment discount even though buyers do not pay within the agreed-upon window (Taulia s 2014 supplier survey). PAGE 12
Dynamic Discounting Only 5% of large corporate buyers currently offer a Dynamic Discounting solution to their suppliers, though adoption of the solution is steadily climbing at a 63% annual growth rate (PayStream, Working Capital Management, p.7). With more success stories and education in the market, additional companies are looking to dynamic discounting as a strategic initiative in their Accounts Payable and Procurement departments, as well as an investment opportunity for Treasury. Dynamic Discounting programs are most successful when coupled with a comprehensive software solution. Automating payables using an einvoicing and supplier self-service portal ensures faster, more efficient processes and therefore higher discount capture. HOW IT WORKS While theoretically possible to utilize without software automating the process, in practice, Dynamic Discounting requires a portal interface between the buyer and supplier. Without a portal, scaling beyond just a few suppliers would not be feasible. As such, we will define the process inclusive of this software. STEP 1: The first step is implementing software that provides a portal interface to offer Dynamic Discounting (or building Dynamic Discounting features into an existing supplier portal). STEP 2: The buyer configures the portal based on their preferences. These include: Determining which suppliers should be eligible to receive early payments on approved invoices. Setting APRs for each supplier based on geography, size, credit rating, etc. Setting a liquidity threshold so the buyer s working capital is never overdrawn. STEP 3: The supplier is invited to join the portal (or they are educated about the Dynamic Discounting feature added to the existing portal). STEP 4: The supplier joins the portal (or enables the Dynamic Discounting feature). Once step 4 is complete, Dynamic Discounting is enabled for the supplier and can be leveraged to accelerate payment at their convenience. When the supplier chooses to get paid early, the Purchase-to-Pay (P2P) process looks as follows. As with other supplier finance solutions, we will explain the process using a simple example of a $100 product being purchased from the supplier. PAGE 13
Dynamic Discounting STEP 5: The purchasing process remains unchanged. The buyer sends a purchase order for $100 to the supplier. STEP 6: After producing and shipping the product, the supplier invoices the buyer for $100. Note: The software portal is often used to automate Step 5 (Electronic PO Delivery) and Step 6 (e-invoicing). STEP 7: Once the invoice is approved by the buyer, the portal notifies the supplier that their $100 invoice is available to be paid early. STEP 8: The supplier logs into the portal, chooses to be paid early and decides which date they would like to be paid. As shown below, the supplier can choose any date between the approval date and the net due date. The system automatically calculates the discount percentage based on the APR the customer set for the specific supplier. 1.5% 1.0% $ 0.5% $ 0% 0 days 10 days 20 days 30 days For example, if the APR is 18%, and the supplier wants to be paid 10 days earlier than the original net due date, the discount would be 0.5% (An 18% APR divided by 360 days is 0.05% per day, times 10 days acceleration is a 0.5% discount). STEP 9: On day 20, the buyer pays the supplier $99.50. WHY USE DYNAMIC DISCOUNTING? Dynamic Discounting is used by buyers primarily for the financial return it provides them. With Dynamic Discounting, buyers can automate the discounting process and ensure that discounts can always be captured between invoice approval and due date - achieving returns higher than with Money Market Accounts (MMA) and Treasury Bonds (T-Bonds). PAGE 14
Dynamic Discounting Dynamic Discounting also strengthens the buyer s supply chain by helping suppliers gain affordable access to cash. This can lower the supplier s production costs, which can get passed along to the buyer in the form of lower prices. Giving suppliers access to financing can also prevent them from going out of business, which eliminates the need to source new products and services. From the supplier s perspective, Dynamic Discounting is an affordable and flexible financing option. Instead of being locked into a multi-year commitment, suppliers can opt in to dynamic discounting offers as they choose, especially when they need cash the most. Unlike reverse factoring, Dynamic Discounting is available to all suppliers and does not require a Know Your Customer process to participate. Plus, rates are often dramatically lower than what is offered with factoring. Unlike reverse factoring, which only addresses the top percentile of suppliers, Dynamic Discounting addresses the entire supply chain, but is most beneficial for the mid to long tail of the supply chain. Dynamic Discounting typically doesn t work for the largest suppliers because their financing rate is lower than the buyer s hurdle rate. The buyer hurdle rate represents the lowest interest rate the buyer is willing to offer for an early payment. 80% OF SPEND 20% SUPPLIERS 20% OF SPEND 80% SUPPLIERS FINANCING RATE $ BUYER HURDLE RATE ( NOT ADDRESSED ) DYNAMIC DISCOUNTING CHALLENGES WITH DYNAMIC DISCOUNTING Each time a supplier accepts an early payment in exchange for a discount, the buyer reduces their DPO, which impacts their working capital. For companies focused on extending DPO and increasing working capital, Dynamic Discounting can be contradictory to these goals. Additionally, this program only works if the buyer has excess liquidity to reinvest in the supply chain. PAGE 15
Supply Chain Finance Plus Supply Chain Finance Plus is an emerging supplier financing solution. Select early adopters have implemented it, and are quickly seeing high adoption rates among their entire supply chain, as well as millions of dollars saved in discount capture. Supply Chain Finance Plus is similar to dynamic discounting, except it allows the buyer the option of using their own cash to fund the early payments, the cash of a third-party financial institution or a combination of both. HOW IT WORKS From a supplier s perspective, Supply Chain Finance Plus is identical to dynamic discounting. It does not make a difference whether the payment comes from the buyer or a third-party, as they go through the same process and see the same options. The process for Supply Chain Finance Plus is the same as dynamic discounting - with the exception of Step 2 variations. STEP 1: Implement a supplier portal solution. STEP 2: The buyer configures the portal based on their preferences. STEP 3: The supplier is invited to join the portal. STEP 4: The supplier joins the portal. Once step 4 is complete, Supply Chain Finance Plus is enabled for the supplier and can be leveraged to accelerate payments at their convenience. When the supplier chooses to get paid early, the Purchase-to-Pay (P2P) process looks as follows, using our normal $100 purchase example: STEP 5: The buyer sends a purchase order for $100 to the supplier. STEP 6: After producing and shipping the product, the supplier invoices the buyer for $100. STEP 7: Once the invoice is approved by the buyer, the software solution notifies the supplier that their $100 invoice is available to be paid early. STEP 8: The supplier can either 1) opt to be automatically paid as soon as an invoice is approved, or 2) log into the portal, choose to be paid early and determines on which date they would like to be paid. Using the same example from dynamic discounting, lets assume the supplier selects being paid 10 days early for a 0.5% discount. PAGE 16
Supply Chain Finance Plus After step 8, two different paths can be taken depending on the funding source. In path A, the buyer s cash is used to fund the early payment. With this path, the entire process is identical to dynamic discounting. On day 20 the buyer pays the supplier $99.50. If after step 8, the financial institution s cash will be used instead of the buyer s, there are three additional steps (similar to reverse factoring). STEP 9: The software solution notifies the financial institution that the supplier should be paid early and specifies the date and amount. STEP 10: On day 20, the financial institution pays the supplier $99.50. STEP 11: On day 30, the buyer pays the financial institution $100. At a later date, the software solution provider pays an information access fee back to the buyer. Unlike all other forms of supplier financing, Supply Chain Finance Plus provides the option of adding third party liquidity to the supply chain or using the buyer s cash. There is complete flexibility for the buyer. Additionally, unlike reverse factoring, when the buyer doesn t use their own cash, they share in the discount capture. Typically, the approach for whether to use buyer cash or third party cash is based on one of three strategies: The buyer determines how much working capital they want to allocate to the program. This is called setting a liquidity threshold. The buyer then funds the early payments until this liquidity threshold is met, at which point, early payments are funded with third-party cash. This strategy is typically chosen when the buyer has limited working capital available, but wants to maximize financial gains through the discounting program. The buyer chooses an APR that is economically acceptable for them. Any early payments made to large suppliers below that APR are funded with third party cash. Payments made above that APR are funded with the buyer s cash. This approach is taken when the buyer s WACC (weighted average cost of capital) is high. The buyer chooses to use third party cash for all transactions. This strategy is often chosen when extending payment terms. It maximizes the increase in the buyer s working capital, allows them to share in discount capture, while still offering financing to their entire supply chain. PAGE 17
Supply Chain Finance Plus WHY USE SUPPLY CHAIN FINANCE PLUS? Supply Chain Finance Plus is advantageous for the buyer regardless of its working capital goals. If selected instead of dynamic discounting, Supply Chain Finance Plus can address the needs of the entire supply chain - from the largest suppliers to the smallest. The graphic below illustrates how Supply Chain Finance Plus addresses the entire supply chain. 80% OF SPEND 20% SUPPLIERS 20% OF SPEND 80% SUPPLIERS FINANCING RATE $ BUYER HURDLE RATE SUPPLY CHAIN FINANCE PLUS CHALLENGES WITH SUPPLY CHAIN FINANCE PLUS The main challenge with Supply Chain Finance Plus is the perceived cost for buyers of using third-party capital to finance their early payment program verses using their own cash. When using third-party capital, the discount share is lower in nominal terms, but depending on the buyer's cost of capital, it may provide more value. For example, if a large buying organization has a very low cost of capital, more benefit can be obtained by using their own cash to receive a higher discount. However, this is not the case if the buying organization has a high or even average cost of capital. After subtracting the cost they incur from using their own cash, the value these buyers receive is lower than their discount share from using third-party financing. An important point to remember however, is that one of the main advantages of Supply Chain Finance Plus is the ability to choose one funding source over another or the option of using the combination of both - providing the best return on investment depending on each individual buyer s needs. PAGE 18
Finding the Ideal Solution With such a wide variety of supplier financing options available, how do you decide which is best for you? In this section, we will compare the features and benefits and review best practices for implementing a solution. PROGRAM ESTABLISHED BY EARLY PAYMENT INITIATED BY FINANCING COST FACTORING REVERSE FACTORING PROMPT PAYMENT DISCOUNTING DYNAMIC DISCOUNTING SUPPLY CHAIN FINANCE PLUS Supplier Buyer Both Buyer Buyer Supplier Supplier Buyer Both Supplier Very High Low Medium Low/Medium Low FUNDER Third Party Third Party Buyer Buyer Either Buyer or Third Party SUPPLIERS ADDRESSED Nearly All Largest Suppliers Nearly All Medium-Long Tail All COMPLEXITY Medium High Low Low High SCALABILITY High Low Low High High The grid above provides a snapshot of each supplier financing program and illustrates their components. It can be used as a map to determine the best solution for your needs. Using this as a guide, let s see how companies choose their solution in the real world. HOW SUPPLIERS CHOOSE A SOLUTION For suppliers looking to get paid early, the options are limited. As shown by the Program Established By row, only factoring, prompt payment discounting and dynamic discounting can be initiated by the supplier. The supplier can ask buyers to implement other supplier financing solutions, but at the end of the day, it s the buyer s decision. PAGE 19
Finding the Ideal Solution Prompt payment discounting is often the simplest solution, but in many cases it doesn t always fit the supplier s needs. As shown by the Early Payment Initiated By row, the supplier does not control whether the early payment is made. As a result, in times of need, prompt payment discounts may not be taken. Furthermore, since only 30% of AP organizations efficiently capture these early payment discounts, most of the time these early payments never occur. For most suppliers, the only supplier financing option that is flexible enough to be useful is dynamic discounting. They have the choice whether or not to accelerate payments, and for which invoices. In contrast, factoring is an extremely expensive form of financing, with APRs much higher than each of the other options and little to no flexibility on which invoices to accelerate. However, once the ideal solution is determined, implementing these supplier financing methods is pretty straightforward. The supplier either asks the buyer to implement a financing solution, such as dynamic discounting, negotiate prompt payment discount terms into future contracts, or contact one of the many factoring companies to create a factoring program. HOW BUYERS CHOOSE A SOLUTION The right solution varies greatly across organizations, due to varying needs and resources. Supplier financing should be looked at strategically and implemented based on the company s specific goals around working capital, DPO, cost savings and ease of use. Buyer size is a clear driver for program selection. Companies under $500M in revenue typically leverage prompt payment discounting as their supplier financing solution, however, it does not scale well for larger companies with slower approval cycles and thousands of suppliers. For companies over $500M in revenue, the choice is often much more complex. Here are a few of the factors that may influence selection: If there is a desire to increase working capital or extend DPO, reverse factoring and Supply Chain Finance Plus are often chosen. These are the best fit because the Funder is a third-party. If working capital is not a constraint and the organization wants to maximize cost reductions by using their own cash (i.e. the Funder is the buyer), dynamic discounting is typically chosen. If flexibility between working capital and cost reduction is needed or if there s a desire to provide financing to suppliers of all sizes ( Suppliers Addressed row), Supply Chain Finance Plus is ideal. PAGE 20
Finding the Ideal Solution Unlike supplier-driven methods, implementing a solution on the buyer side can be extensive. After the desired solution is determined, buyers should focus on ensuring the enabling technologies are in place, or that their supplier financing provider is able to offer them a packaged solution that includes the enabling technologies. The single most important enabling technology is a software portal to automate communication between the buyer and supplier. This component is a requirement for many forms of supplier financing. In addition to a portal, to maximize discount capture, the buyer needs to reduce the time it takes to approve an invoice. Some organizations will already have an effective process, however for those that do not, einvoicing and AP workflow solutions should be evaluated. Each of these solutions can reduce the invoice approval time dramatically, which allows payments to be made earlier. Each provider approaches automation and financing solutions slightly differently and the results can be varied. For example, many providers charge suppliers transaction fees for the software portal. While this may seem appealing because it reduces the buyer s cost for the program, it often results in lower adoption. With lower adoption, the ROI will decrease dramatically even though the tangible cost is lower. If you receive 15% adoption, you only receive 15% value of your program Henry Ijams, PayStream Advisors PAGE 21
Conclusion Supplier financing can be confusing. There are many different types available, important nuances that add complexity, and numerous evaluations that must be made. Supplier financing is flexible. It can help organizations meet their goals, including extending DPO, increasing working capital, reducing costs, and strengthening their supply chain. Supplier financing is evolving. The market today is far different than it was just a few years ago. The next 5 years will lead to even greater change. Interested in learning more about available financing solutions or have questions on which solution is right for you? Contact Taulia today for your free consultation. info@taulia.com +1 415 376 8280 Ext. 1 Taulia Americas 201 Mission Street San Francisco Ca 94105 +1 415 376 8280 info@taulia.com Taulia EMEA 131 Great Titchfield Street London W1W 5BB United Kingdom +44 (0) 20 3700 3525 Taulia Germany Gladbacher Strasse 74 40219 Düsseldorf Germany +49 211 6355 2650 Taulia Bulgaria 115G Tsarigradsko Shosse, 8E 1784 Sofia, Bulgaria Megapark Building PAGE 22