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Prompt payment, at least for small suppliers, has gotten a great deal of attention this year. Nearly fifty companies, many of which are globally recognized brands, have signed onto the White House’s SupplierPay Pledge. Under the initiative, signatories pledge to pay SMB suppliers more quickly, or to provide access to alternative funding to accomplish the same goal. It’s great news for SMBs and an incredibly important development for the market as a whole.
This effort has brought a lot of attention to supply chain finance and is pushing the continued evolution and expansion of that term. It does not directly replace pre-manufacturing or pre-export finance. This new wave of SCF is purely focused on accelerating payment after an invoice has been approved. The indirect effect of better working capital management for suppliers may lessen the need for more traditional trade finance, to the extent that it has been used to make up for gaps from extended receivables. Where earlier-stage financing is more of a risk-management mechanism, ensuring some funding of specific manufacturing projects, for example, there is no reason to expect change.
Because the term “supply chain finance” is evolving, so too is the context within which we discuss it. It should be viewed alongside related options like buyer-financed discounting programs: mechanisms for advancing funds to suppliers more quickly, which differ mainly in the source of the funds used. These options are predicated on efficiently receiving, reviewing and approving invoices. Without this piece of the puzzle, payments are delayed until near (or past) their due dates, and the window for gaining additional benefits closes.
Automation in procure-to-pay can take many forms. Often, it means transitioning to higher volumes of electronic invoices and finding an efficient way to extract data from the portion of invoices that remain paper-based. For 70 percent of the highest performers in the Institute of Financial Operations’ 2014 AP Automation Study, it also means tying purchase order automation to their invoice automation initiatives. This provides data against which invoices can be automatically matched, improving straight-through processing rates and increasing the pool of potential payments under a discounting or SCF program.
Especially in the context of discounting, this newfound efficiency is a huge boon for buyers. With competitive rates, SCF programs can be equally as valuable to suppliers as well. The question isn’t how far above zero the financing rate is; the real question is how far it is below the rate at which suppliers would normally finance their operations. While some may be healthy enough to run purely off of operational cash flows, the vast majority will look elsewhere for financing. If SCF programs are competitive with banks and factors, both buyer and supplier are better off.
Expect 2015 to bring greater awareness of SCF options, moderately higher numbers of firms automating their P2P processes, and more top-tier signatories to the SupplierPay Pledge. Look, also, for expansions of both discounting and SCF programs and additional entrants in the market aiming to facilitate them. Finally, as these leading companies put programs in practice, look for proof. There really is something there, and while it may look like greenwashing, it doesn’t have to be.
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