These are perilous times for suppliers in the technology sector. Margins are growing increasingly thin, the demands of customers are intensifying, and working capital can be tough to secure, especially for small and medium-sized businesses.
The dilemma has led to a number of creative financing solutions, especially at a time when traditional banks are showing less interest in coming to the aid of smaller entities.
For nearly three years, Tech Data Corp. has been drawing on the services of C2FO, creator of a market for working capital which brings together suppliers and buyers, with the goal of enabling early payment of invoices.
Based in Clearwater, Fla., Tech Data is a global wholesale distributor of a wide range of technology products and services. Vice president and treasurer Scott Walker describes the company’s business as stretching “from the data center to the living room.” Net sales for the fiscal year ended Jan. 1, 2017 were $26.2bn.
Tech Data vendors have relied on C2FO for access to working capital in the U.S. since 2014. Walker says Tech Data found the vendor through networking. He had previously worked with C2FO managing director Jordan Novak at a technology manufacturer, and Novak was also employed by one of Tech Data’s largest tech vendors. Recently, Tech Data expanded that partnership to Europe, and extended the relationship for another five years.
From Retail to Tech
C2FO launched in 2010, with an initial focus on retailers. With Novak and other team members on board, the company began courting technology buyers, with an emphasis on “nimble cash management, and flexibility of cash-allocation programs,” he says.
C2FO operates a platform that allows suppliers to obtain early payment from their customers. Unlike many traditional early-payment arrangements, the supplier names its own rate — much in the way that consumers book travel and lodging through Priceline.com and similar sites.
C2FO serves as a single marketplace for all of a company’s accounts receivable, enabling early payment across all customers with a single click, says Novak. Rates for suppliers are approximately 10 times cheaper than those from online lenders, he claims.
Entities such as C2FO are finding new market niches, as banks step away from trade-finance services for smaller customers. New banking regulations, coupled with a more cautious approach to lending in the wake of the Great Recession, are among the factors driving change.
Big technology companies remain unaffected, “but if you’re a new vendor trying to break into the technology space and your credit rating is not up to snuff, the bank is going to have to set aside a lot of capital to make a loan to you,” says Novak.
Up until recently, Tech Data had been negotiating early-payment deals on an individual basis. “It’s a very time-consuming and inefficient way to do it,” says Walker.
Tech Data saw a clear opportunity to streamline the process in Europe, through deployment of the C2FO platform. More than half of small and medium-sized businesses on the continent view cash flow as a major obstacle to growth, according to the 2016 C2FO Working Capital Outlook Survey. In addition, low interest rates — in some cases, negative rates — were causing companies to sit on excess cash reserves, and becoming a drag on earnings. Says Walker: “We had to find a better way to generate returns for shareholders.”
Optimizing Cash
Tech Data has its own set of unique challenges. It competes in a high-velocity, low-margin business, notes Walker, “and optimizing cash is critical to our success and returns. C2FO gives us a good platform for doing that.”
The European deal and five-year extension allow Tech Data’s suppliers to assert greater control over cash flow and improve their financial metrics, the company says. The key lies in accelerating the payment of approved invoices “at a rate that works for them.” C2FO plays the role of intermediary, bringing together supplier and buyer in mutually beneficial arrangements.
“If a vendor of ours isn’t offering economically worthwhile terms to pay them early, we will hold on to our cash,” says Walker. “The C2FO market helps you to meet in the middle.”
When it comes to savings arising from use of the C2FO platform, Walker declines to disclose hard numbers. But he says Tech Data’s returns from the early-payment arrangements “will typically exceed our cost of capital.” Suppliers benefit as well, in gaining access to cash more quickly, even at a discounted rate. “In a low-margin business,” Walker says, “every basis point counts.”
Tech Data already does business in more than 40 countries around the world. And while its current focus remains on growing the business in Europe, the company is eyeing markets elsewhere. A recent acquisition brought it into the Asia-Pacific region, “and we see ourselves as continuing to expand,” says Walker.
For its part, C2FO has spent the last two years investing in building out its European and Asia-Pacific programs. “We can definitely see where we can go with Tech Data over time,” says Novak, adding that the company is “really excited to see what we can do [for Tech Data] in Europe.”
“It’s been a positive experience, and a collaborative relationship,” says Walker. “C2FO does a good job of solving a problem without creating new ones. That’s why we renewed for five years.”
