Executive Briefings

How Dynamic Discounting Solutions Ease Regulatory Concerns

As global companies increasingly explore dynamic discounting solutions to improve their operating income and provide much needed working capital flows to their supply chain, questions often arise about how government regulations and accounting standards come into play.

How Dynamic Discounting Solutions Ease Regulatory Concerns

In fact, truly dynamic discounting solutions assist in eliminating risk and easing regulatory concerns, both for corporates and for the businesses within their supply chains. To understand why, we’ll look at some of these regulations and explore why they don’t apply to dynamic discounting programs.

Post-crisis banking regulations

The recent financial crisis affected economies around the globe and led many governments to enact regulations designed to help banks – and the economies that depend on them – to avert future crises of that magnitude. Some of those regulations have had far-reaching effects on banks and corporates alike, and introduced certain financial challenges for both.

Most experts agree that the Basel III regulations have had the most pronounced impact of all the new post-crisis governmental initiatives. While Basel III has been successful in helping to ensure that banks stay solvent by holding adequate liquid assets to balance liabilities, it has ultimately led to the global imbalance of liquidity between large corporates and small to medium-sized enterprises (SMEs) that we see today.

The Basel III liquidity coverage ratio compels banks to meet their liquidity needs for a 30 calendar day liquidity stress scenario by keeping a stock of unencumbered high quality liquid assets (HQLA) – e.g., cash or assets that can be converted into cash in private markets with little or no loss of value. To meet these requirements, banks have tightened up on lending to higher-risk companies and increased the cost of credit. This had led to a situation where large corporates are stockpiling cash that earns very little interest, while at the same time SMEs find it difficult to obtain traditional financing and funding.

Dynamic discounting is an ideal solution to the unintended consequences of banking regulations for both the large corporates and the SMEs that make up their supplier base. Because these dynamic discounting programs provide a mechanism for large companies to use their cash reserves to offer early payments to SMEs, they are an effective use of cash. This is particularly true when you take into account the low or even negative interest rates that many financial institutions currently offer depositors.

The corporates get higher returns on their cash and benefit from de-risking their supply chains as they provide these SMEs with much-needed cash flow and liquidity at a reasonable cost.

Anti-money laundering regulation

Because dynamic discounting is associated with supply chain finance (SCF), some companies may question whether all SCF programs are subject to the same accounting ramifications and regulations. Some types of SCF programs take the form of loans to suppliers based on the buyer’s credit rating, which means that the anti-money laundering (AML) regulations that apply to the banks issuing the credit also apply to those programs. Therefore, certain geographic markets and categories of goods may need to be excluded from those SCF programs.

With a true dynamic discounting program, a buyer is paying its suppliers with its own cash, just sooner than dictated by their original payment terms. These programs do not involve a bank paying suppliers on a buyer’s behalf, so AML regulation does not come into play. That means that a company that includes dynamic discounting in its holistic supply chain finance program can provide early cash flow to the entire supply chain.

Payables reclassification

The same reasoning applies when considering whether dynamic discounting programs are subject to payables reclassification. Again, using a true dynamic discounting model, the corporate is using its own cash for early payment of its suppliers and not assigning A/R to another party. Thus, the amount paid early cannot be reclassified from trade payables to debt because it comes directly from the company itself and not from a financial institution. The ability to match accounts receivables to accounts payable eliminates the need for underwriting and any associated risk.

Dynamic discounting as a prompt payment solution

Last but not least, we have the various prompt payment regulations that are being introduced throughout the world in response to the practice of extending payment terms. Treasurers and CFOs are well aware of the need to comply with prompt payment regulations and are seeking solutions that are ethical and fair for their suppliers yet still address their financial objectives.

Here are just a few examples of prompt payment initiatives currently in place:

In Europe, Directive 2011/7/EU requires a maximum of 60-day payment terms unless the supplier agrees to an exception. The U.S. has a similar mandate that applies to federal and local governments when they pay their own suppliers and contractors, but limits on payment do not currently apply to other businesses.

Less binding but still important for public perception are government-supported voluntary supplier payment programs. In the U.S., there is the SupplierPay Initiative, which is a partnership between the White House and the Small Business Administration (SBA) that encourages large corporations to publicly join the rolls and “pledge to pay their small suppliers faster or enable a financing solution that helps them access working capital at a lower cost.”

In the UK, there is a Prompt Payment Code (PPC) designed to standardize payment terms and supplier relations practices, supported by the Department of Business Innovation and Skills (BIS). It is more specific about payment best practices than its U.S. counterpart, but as with the SupplierPay Initiative, large businesses must volunteer to enroll and agree to its terms.

At a recent roundtable discussion in London, Charles-Henri Royon, vice president, EMEA, at Tradeshift, brought up the late payment ramifications for companies in France, “…if companies don’t pay on time, they can be fined by the state. Right now the maximum fine is 100K euros. It seems like it’s very little, but it is usually picked up by the press and the echo and impact is much more important.”

Do the right thing

The majority of companies want to do the right thing when it comes to prompt payment, and are seeking the ideal solutions to facilitate compliance. Whether or not prompt payment terms are legally required, a true dynamic discounting program helps corporates promote the health of their supply chain by giving suppliers a way to accelerate the working capital flows they need for steady operations and growth. These programs also set up a framework for automatically adhering to prompt payment guidelines whenever suppliers request early payment.

The corporate buyers benefit from technology-enabled dynamic discounting in a number of ways: increasing return on their excess strategic cash, gaining compliance with prompt payment codes (whether voluntary or compulsory), and earning a positive reputation as a company that treats its suppliers fairly and ethically. Advances in market-based dynamic discounting allow for unparalleled transparency between buyers and suppliers to help eliminate risk and concerns about regulation for companies and their supply chains.

Source: C2FO

In fact, truly dynamic discounting solutions assist in eliminating risk and easing regulatory concerns, both for corporates and for the businesses within their supply chains. To understand why, we’ll look at some of these regulations and explore why they don’t apply to dynamic discounting programs.

Post-crisis banking regulations

The recent financial crisis affected economies around the globe and led many governments to enact regulations designed to help banks – and the economies that depend on them – to avert future crises of that magnitude. Some of those regulations have had far-reaching effects on banks and corporates alike, and introduced certain financial challenges for both.

Most experts agree that the Basel III regulations have had the most pronounced impact of all the new post-crisis governmental initiatives. While Basel III has been successful in helping to ensure that banks stay solvent by holding adequate liquid assets to balance liabilities, it has ultimately led to the global imbalance of liquidity between large corporates and small to medium-sized enterprises (SMEs) that we see today.

The Basel III liquidity coverage ratio compels banks to meet their liquidity needs for a 30 calendar day liquidity stress scenario by keeping a stock of unencumbered high quality liquid assets (HQLA) – e.g., cash or assets that can be converted into cash in private markets with little or no loss of value. To meet these requirements, banks have tightened up on lending to higher-risk companies and increased the cost of credit. This had led to a situation where large corporates are stockpiling cash that earns very little interest, while at the same time SMEs find it difficult to obtain traditional financing and funding.

Dynamic discounting is an ideal solution to the unintended consequences of banking regulations for both the large corporates and the SMEs that make up their supplier base. Because these dynamic discounting programs provide a mechanism for large companies to use their cash reserves to offer early payments to SMEs, they are an effective use of cash. This is particularly true when you take into account the low or even negative interest rates that many financial institutions currently offer depositors.

The corporates get higher returns on their cash and benefit from de-risking their supply chains as they provide these SMEs with much-needed cash flow and liquidity at a reasonable cost.

Anti-money laundering regulation

Because dynamic discounting is associated with supply chain finance (SCF), some companies may question whether all SCF programs are subject to the same accounting ramifications and regulations. Some types of SCF programs take the form of loans to suppliers based on the buyer’s credit rating, which means that the anti-money laundering (AML) regulations that apply to the banks issuing the credit also apply to those programs. Therefore, certain geographic markets and categories of goods may need to be excluded from those SCF programs.

With a true dynamic discounting program, a buyer is paying its suppliers with its own cash, just sooner than dictated by their original payment terms. These programs do not involve a bank paying suppliers on a buyer’s behalf, so AML regulation does not come into play. That means that a company that includes dynamic discounting in its holistic supply chain finance program can provide early cash flow to the entire supply chain.

Payables reclassification

The same reasoning applies when considering whether dynamic discounting programs are subject to payables reclassification. Again, using a true dynamic discounting model, the corporate is using its own cash for early payment of its suppliers and not assigning A/R to another party. Thus, the amount paid early cannot be reclassified from trade payables to debt because it comes directly from the company itself and not from a financial institution. The ability to match accounts receivables to accounts payable eliminates the need for underwriting and any associated risk.

Dynamic discounting as a prompt payment solution

Last but not least, we have the various prompt payment regulations that are being introduced throughout the world in response to the practice of extending payment terms. Treasurers and CFOs are well aware of the need to comply with prompt payment regulations and are seeking solutions that are ethical and fair for their suppliers yet still address their financial objectives.

Here are just a few examples of prompt payment initiatives currently in place:

In Europe, Directive 2011/7/EU requires a maximum of 60-day payment terms unless the supplier agrees to an exception. The U.S. has a similar mandate that applies to federal and local governments when they pay their own suppliers and contractors, but limits on payment do not currently apply to other businesses.

Less binding but still important for public perception are government-supported voluntary supplier payment programs. In the U.S., there is the SupplierPay Initiative, which is a partnership between the White House and the Small Business Administration (SBA) that encourages large corporations to publicly join the rolls and “pledge to pay their small suppliers faster or enable a financing solution that helps them access working capital at a lower cost.”

In the UK, there is a Prompt Payment Code (PPC) designed to standardize payment terms and supplier relations practices, supported by the Department of Business Innovation and Skills (BIS). It is more specific about payment best practices than its U.S. counterpart, but as with the SupplierPay Initiative, large businesses must volunteer to enroll and agree to its terms.

At a recent roundtable discussion in London, Charles-Henri Royon, vice president, EMEA, at Tradeshift, brought up the late payment ramifications for companies in France, “…if companies don’t pay on time, they can be fined by the state. Right now the maximum fine is 100K euros. It seems like it’s very little, but it is usually picked up by the press and the echo and impact is much more important.”

Do the right thing

The majority of companies want to do the right thing when it comes to prompt payment, and are seeking the ideal solutions to facilitate compliance. Whether or not prompt payment terms are legally required, a true dynamic discounting program helps corporates promote the health of their supply chain by giving suppliers a way to accelerate the working capital flows they need for steady operations and growth. These programs also set up a framework for automatically adhering to prompt payment guidelines whenever suppliers request early payment.

The corporate buyers benefit from technology-enabled dynamic discounting in a number of ways: increasing return on their excess strategic cash, gaining compliance with prompt payment codes (whether voluntary or compulsory), and earning a positive reputation as a company that treats its suppliers fairly and ethically. Advances in market-based dynamic discounting allow for unparalleled transparency between buyers and suppliers to help eliminate risk and concerns about regulation for companies and their supply chains.

Source: C2FO

How Dynamic Discounting Solutions Ease Regulatory Concerns