What is Supplier Financing?

October 10, 2014 Matthew Stammers

what-is-supplier-financing

Just what is supplier financing?

I have talked before about Dynamic Discounting and Enhanced Discounting, and how they are mechanisms to pay suppliers early using a buyer’s own cash (Dynamic Discounting), or using third party cash (Enhanced Discounting). I want to propose that both of these terms fall under the broader term frequently used:  ‘Supplier Financing.’

Supplier Financing is a long-used term that has gained momentum in the Finance and Purchase-to-Pay worlds. On first glance it looks and feels like a piece of abstract, and somewhat ‘geeky’ jargon. And indeed, in some ways it is. Take another look though and it is a very simple phrase that is used as an umbrella term to cover any sort of finance initiative that might be put in place to pay suppliers in the supply chain from the buyer perspective i.e. financing suppliers. However, even this phrase feels a little ‘jargony’ so let’s break it down further.

Buyer payment strategies

Many large buying companies are focused on improving their cash position and one of the mechanisms to achieve this is to build working capital by working with suppliers to extend payment terms, resulting naturally in a longer Days Payable Outstanding – DPO. Of course, the buyer’s benefit comes at a cost to the supplier, so corporates are putting in place mechanisms to ensure that suppliers have the option to get paid earlier.

Other goals in engaging a supplier finance program might be to reduce the cost of goods sold and/or improve the strength of their supply chain by giving them access to funding. All of these initiatives require the implementation of some type programme to address the requirement. Typical buyer-led finance programmes include:

  • Paying early using own cash – Dynamic Discounting

  • Paying early, on time or extending using third party funding  – Enhanced Discounting

Supplier Finance can thus be defined as the use of a buyer-led/programme supported by a technology platform to ensure that suppliers get timely access to much needed cash. This can cover any one of the above programmes – make sense?

The origins of Supplier Financing

So now that we understand what supplier financing is, the next question to ask is where it came from. And the answer lies in the convergence of two very different markets and three very different types of competitors.

  1. Bank-led Supply Chain Finance

For those in the arena of supplier finance they will be fully aware that the first version of supplier financing was in the form of bank-led Supply Chain Finance programmes. The aim of the majority of these programmes was to improve the working capital position of a company and provide timely finance to the top suppliers. These programmes worked well within those narrow confines, but did nothing for the much broader supply chain. They have also been costly and time consuming to implement as banks are constrained by their risk models and legacy technology platforms.

  1. Bank agnostic SCF providers

To address some of the issues related to a single bank-led programme, other providers have emerged that provide SCF on a single technology platform with access to multiple funding providers. This has the advantage of removing the reliance on any one bank, thus giving more flexibility regarding funding sources. However, the programmes, for varying reasons, and still typically favour the top 25-50 suppliers keeping these in the realms of a working capital improvement exercise rather than anything broader.

  1. Technology-led early payment providers

Most recently however, a new category of providers have emerged. These providers start point is to use the benefits inherent in eInvoicing and suppliers portals to provide buyers with a network that connects the buyer with their entire supply chain. In its first iteration this network was used to offer early payments to suppliers in exchange for a small discount, however, now these technology-led players are using these networks to pay suppliers either on time or early using either a buyer’s own cash or third party cash.

The advantages of this type of approach are significant:

  • Buying companies can still benefit from a terms extension exercise but now can extend this to their whole supply chain

  • The platforms are funder agnostic so multiple funding providers can take part in the programme

  • Early payment opportunities means that buyers can share the benefit with the funder

  • Suppliers get much needed access to affordable finance, meaning that buyers strengthen their supply chain

Market convergence

So we now have a market for financing supplier early payment that is serviced by traditional supply chain finance programmes on one hand and by this new breed of technology players on the other.

And ultimately the term Supplier Financing has broadened to cover what is now possible – highly flexible early payment solutions to the suppliers using in-house or third party cash, or a blend of both. Supply Chain Finance, although relatively well understood conjures images of  traditional programmes requiring lengthy and costly implementations, people and processes that only address a small percentage of the overall suppliers in the chain. Supplier Financing more broadly describes the options available.

Why Supplier Financing should matter to you

Now that Supplier Financing has been democratized, a great deal of creativity has resulted in much broader choices. Now you can decide what your key goals are and pick a programme that addresses them directly, and just as importantly, can evolve with you as those goals adapt and change.

 
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