The SupplierPay pledge that 26 large corporations signed in a July press conference at the White House has as one of its two tenets the need to craft financing solutions that allow small suppliers to get paid faster. Luckily, there are three technologies that—when implemented correctly—can allow large corporate buyers to give their small suppliers working capital sooner without necessarily impacting Days Payable Outstanding. These are Supply Chain Finance, Dynamic Discounting, and Business Networks.
Supply Chain Finance
Supply chain finance is a practice whereby a supplier sells an approved invoice to a third-party financer in order to garner payment more quickly than the agreed-upon payment terms. The third-party financer then accepts payment from the buying organization at the original maturity date, whether that’s net-60, net-90, net-120, etc. This allows the supplier to get paid sooner, providing more cash on-hand when they need it, while enabling the buyer to keep its DPO high so that it too has access to more working capital for a longer period of time.
Overall, supply chain finance is a win-win for all parties involved. It also fulfills that need of SupplierPay to give small companies access to working capital sooner. Solution providers like Tungsten Network, Bottomline Technologies, and Taulia both offer supplier financing solutions to get this done—Taulia partners with Citi to fulfill supply chain finance requests, while Tungsten has its own self-branded bank that provides an alternative financing option to its customers. Historically, supplier financing has only made sense for larger companies to provide to their large suppliers, but in recent years solution providers such as Bottomline, Tungsten, and Taulia have made it easier to offer SCF across the entire supply chain.
Interest in supply chain finance is also growing. According to Ardent’s “ePayables 2014: The Quest” report, only 11% of organizations currently use supply chain finance solutions, with another 22% looking to start using them in the next 12 to 24 months. Add in the new SupplierPay initiative, and you can start to see more growth potential for solutions like Taulia, Bottomline, and Tungsten.
Dynamic Discounting
Dynamic discounting allows AP departments to set rules around providing early payment discounts based on certain requirements or allows for suppliers to negotiate a discount based on payment timing. The more mature solutions allow for AP teams to offer discounts on a real-time, dynamic basis; this allows for AP teams to incorporate their often fast-changing cash positions in real time.
In terms of annualized rate of return, discounting on early payments can offer significantly better returns than what companies receive on overnight funds. Consider one potential discount—2/10 net 30—where a 2% discount is provided if the buyer pays before day 10 of the invoice period. When we plug these numbers into an Annualized Rate of Return formula, which my colleague Andrew Bartolini references in a CPO Rising article (Free Money (Details Inside)), we discover that the annualized rate of return for paying early in a 2/10 net 30 situation is 36.73%. This is significant savings over the long term, and could result in significantly more cash on-hand for buying organizations. Consider that on $2 million of spend, a 36.73% savings could result in $734,600 in “free money” over the course of a calendar year. Who wouldn’t want nearly three-quarters of a million extra money that requires barely any work at all?
Taulia and Ariba are two out of the many solution providers that offer dynamic discounting solutions; discounting products like this tend to get added into another platform as a way to add value to eInvoicing capability. Like supply chain finance, dynamic discounting offers suppliers quick access to credit when they need it and allows for buying organizations to earn a return on their available cash. It also has similar adoption and interest rates to SCF; only 13% of organizations surveyed for Ardent’s “ePayables 2014” report currently use dynamic discounting tools, with 30% looking to adopt just such a solution in the next 12 to 24 months. Like supply chain finance, dynamic discounting allows buying organizations to provide working capital to their suppliers sooner than agreed-upon payment terms and create a strong return on investment by leaving more cash in the buyer’s coffer at the end of the day.
Business Networks
A business network is yet another tool that can be used to speed access to working capital. Usually a cloud-based platform, business networks allow for communication directly between buyers and suppliers as well as some AP automation capabilities such as ePayments, eInvoicing, and occasionally a holistic P2P process—depending on the solution used of course. At a functional level, business networks allows buyers and suppliers to trade, collaborate, and communicate with each other.
By its nature as a transaction hub or enabler, a business network can facilitate access to working capital because suppliers don’t need to constantly contact their customers’ accounts payable departments to find out the status of their invoice. Many networks also allow suppliers to request early payments directly through the portal, such as Taulia, Tradeshift, Basware, and Ariba.
Business networks have grown in popularity in recent years, and look to show further inroads into the marketplace. Nearly half of the survey respondents in Ardent’s recent ePayables 2014 report noted that they were looking at getting a business network within the next two years. That’s a fairly sizeable number, and provides a clear indicator of interest in enhancing collaboration with suppliers.
So What’s the Deal?
The potential benefits of SupplierPay are easy to see: increased access to working capital allows small businesses to grow. What’s not yet apparent is whether or not the voluntary initiative will make a difference. That said, technologies such as Supply Chain Finance, Dynamic Discounting, and Business Networks do simplify the workflow for companies to improve access to working capital for their small suppliers, while also allowing them to capture early payment discounts, increase collaboration, and even retain a high DPO while not impacting their suppliers’ cash holdings. The technology is here. All that needs to happen now is for more businesses to start using it.
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